“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” – Warren Buffett, CEO of Berkshire Hathaway.
While investor pessimism is at its highest in 20 years , and the media continues to highlight a melancholy scenario for our economy, due to inefficient pricing and fear in the market, bear markets can actually present opportunities for investors. Since 1987, the S&P 500 Index has seen double-digit gains 85% of the time after extremely pessimistic sentiment . So instead of thinking of how bad the market is doing, investors may be better off thinking of the market as being significantly less expensive.
While bear markets can hurt when we see our investment values falling, in reality, they only account for 29% of the market environment, with bull markets making up the majority share (71%). As the chart below shows, overall, stocks have spent around two-thirds of the time at or near all-time highs.
As we have always championed at Finura, a long-term approach to investing is key – despite the short-term impact that inflation, interest rates and investor sentiment can have on the market, stocks often weather the storm. Just as bear markets can promote investor uncertainty, rising interest rates can also cause stock market disruption. However, since 1954, the S&P 500 Index has returned an average 9.4% annually during Fed rate hike cycles. Furthermore, as the chart below demonstrates, the S&P 500 Index has had positive returns 11 out of 12 times during periods of rising interest rates.
In summary, while bear markets can incite pessimism and fear, they are usually short-lived. By considering a contrarian point of view, and learning from historical market cycles, there is always a bright side if you look for it.
If you would like to discuss any of the above in more detail, please contact your financial planner here.
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