As of Monday this week, the S&P 500 entered bear market territory. The technical definition of a bear market is an index dropping 20% from its most recent peak. It’s scary to watch account values drop along with the stock market. Worries of future unmet goals can get the better of us, especially when exacerbated by dramatic media headlines and flashing red indicators.
Often the next concern that accompanies a bear market is whether our economy is headed into recession. The technical definition of a recession is rather sterile. It’s defined as two consecutive quarters of declining Gross Domestic Product (GDP). But recessions come in different forms. They may be short like the Covid-19 recession, which hit in the spring of 2020 and only lasted a few months. Or, they can be longer with greater impact like the Great Recession of 2008-2009. Fears of the next recession are running hot right now, especially as we watch stocks march further into bear market territory. But, it’s important to keep in mind that not all recessions are as bad as 2008-2009, and some of us will be less affected by a recession than others.
During a recession, just like in a bear market, the question becomes one of staying power. In the case of a bear market in stocks or bonds, do you have to “sell low” to fund a need? Do you have other resources that can be utilized instead? Or can you make different choices that allow you to hang onto an investment until it recovers? In the case of recession, the question becomes one of whether you have the resources to stay afloat financially should you become temporarily unemployed, have higher bills due to inflation, or rising interest rates on variable rate debt. For most people who can maintain income or have enough in liquid assets, a recession might mean some harder choices, but it rarely means financial ruin. And “resources” don’t just refer to income or assets, they can also include things like familial support or access to new training or education.
It’s imperative to keep in mind that neither bear markets nor recessions last forever. They have occurred in the past and will do so again in the future. As hard as they are to stomach, they are, in fact, a normal part of the business cycle. To help illustrate this is a chart below from First Trust, which reflects the history of U.S. bear and bull markets with periods of recession overlayed in gray. As you can see, bull markets last significantly longer and have greater magnitude as compared to bear markets. And while they usually coincide, there are also periods where bear markets occur without a recession and vice versa.
Because bear markets and recessions are not within our control, we encourage you to focus on what is within your control. We challenge you to ask yourself: What, if anything, should I do differently? Do I need to delay a significant expenditure? Or tighten my belt in order to stockpile cash for a rainy day or pay down high/variable rate debt? Prudent choices will help you feel confident in the ability to weather the difficult, yet temporary, conditions that exist now and in the future.