What follows is a hypothetical conversation in response to the question, “When will the markets go back up?”
“Are we there yet?”
“Do you mean we aren’t at the bottom yet?”
“Or that we aren’t ready for the next turnaround?”
“How long will the bear market last?”
That depends, but the average cyclical bear lasts slightly over two years. We are ten months into this cycle right now, so market volatility could last a bit longer. Then again, these are just averages.
The best answer to your question really is: watch the Federal Reserve. The first sign of a possible end to the bear market is when the Federal Reserve pauses its interest rate increases.
“Are you getting wonky with me?”
Yes. But watching the Fed can tell you a lot.
“So, when will the Federal Reserve pause raising interest rates?”
There are three notable scenarios which could cause the Federal Reserve to pause.
- Inflation makes steady monthly progress falling to a level of around 4%. (Unfortunately, the latest inflation reading is double that rate with no signs of a steady decline. So, we are probably nowhere near done fighting inflation.)
- The labor markets run into trouble, with the unemployment rate rising to unacceptable levels, maybe around 4.5% – 5%. (Currently the unemployment rate is at 3.5%, matching its lowest level in 50 years, so rising unemployment isn’t currently a big issue.)
- Something breaks. This usually means the bond markets dry up (no one wants to buy bonds; everyone wants to sell). This is called lack of liquidity. When this happens, the Federal Reserve has several tools it can implement to increase the flow of money, so that businesses and consumers can continue spending. At the same time, the Fed would likely pause any interest rate increases until the bond markets settled down. (While liquidity concerns are increasing, this isn’t a problem for the US right now.)
“So, if the Fed pauses its interest rate increases, that’s the end of the bear market, right?”
It could be if the Fed has successfully tamed inflation. Ideally, the Fed will pause at a rate that isn’t overly burdensome to the economy, and then observe whether inflation continues to fall closer to 2%. If that happens, then, yes, the bear market could likely be over.
But if the Fed decides to pause because we enter a deep recession, and subsequently lowers rates to boost us out of that recession, the Fed could be opening a window for inflation to snap back higher. That would require the Fed to start the painful process of raising rates all over again, and the markets would not be happy.
This happened in the 1970’s, when the Fed had to battle inflation three times. The current Fed is very mindful of mistakes made in the 1970’s and is carefully trying to navigate the balance between raising rates and damaging the economy.
“Isn’t there another way for the government to tackle inflation?”
Not that would be acceptable. The country would need to raise taxes and/or cut spending, which politicians are loathe to do. So, the Federal Reserve is given the tough job of reigning in inflation. The Fed isn’t an elected body.
“That sounds cynical.”
Yes, it does. But it is a good thing the Fed is in charge. In my opinion, over the last three decades, the Federal Reserve has done a skillful job of helping to bail us out of various monetary crises (2001 stock market bubble, the 2008 Great Recession, and the pandemic liquidity crisis, to name a few). So, while there are no guarantees the Fed will get it right this time, it is deemed by many to be the best body to tackle inflation.
“You don’t sound overly optimistic about a rally.”
To the contrary, I am. I know markets will go back up; I just don’t know when.
“Can you be more specific?”
Well, I can tell you that since 1950 there have been ten sustained bear markets, where the S&P 500 has fallen 20% or more. One year after the decline, 70% of the time, stocks were higher – on average by 15%. And three years later, all but one bear market had recovered, with an average return of 29%. The one holdout was the 2008 Great Recession. Markets recovered that time as well; it just took longer. So, yes, if history is our guide, markets will rebound once we reach the bottom and start turning the corner.
It’s easiest if you remember that we are in the middle of a business cycle, where hot economies must be tamed and struggling economies need extra support. As we move between the highs and lows of any business cycle, there is bound to be pain, which can include bear markets. It then becomes a matter of time before we move from the lows to the highs, and experience the benefits of a growing economy, including rising stock prices.
“So, I guess it is best to hang in there.”
Yes. Although hanging in there can be tough emotionally, most often it is worthwhile to be invested while you wait.
Betsey A. Purinton, CFP® is Managing Partner and Co-Chief Investment Officer at StrategicPoint Investment Advisors in Providence and East Greenwich. You can e-mail her at firstname.lastname@example.org.
The information contained in this post is not intended as investment, tax or legal advice. StrategicPoint Investment Advisors assumes no responsibility for any action or inaction resulting from the contents herein. Betsey’s opinions and comments expressed on this site are her own and may not accurately reflect those of the firm. Third party content does not reflect the view of the firm and is not reviewed for completeness or accuracy. It is provided for ease of reference.