The S&P 500 reported its worst first half of the year since 1970, plunging 20.6% in the first six months of 2022. Inflation was more than 9% at the end of June, the highest in 40 years. The Nasdaq Composite dropped approximately 28%, while big tech stocks such as Meta (-51%), Amazon (-36%) and Apple (-22%) all got creamed in the first half of the year. We have all felt the market’s impact on our investments, and the question we are all asking is what’s next?
Is this the time to sell stocks? To hold on to stocks? Will the market go down even further?
At the time of writing, the SXP500 had its best month since November 2020 in July 2022, gaining more than 9%. Nonetheless, inflation, supply chain problems and energy costs, suggest that we are far away from a recovery.
Decision-making during a bear market
Bear markets affect people differently. If you were expecting to liquidate your investments in the near future and put the money to use, bear markets can be very difficult. If you were invested for the long run, bear markets might have less of an effect on you.
Although bear markets can take an emotional toll on investors, US eToro analyst Callie Cox urges investors not to let emotions take over decision-making. “Don’t let your emotions get to you, even if your instincts are telling you to run and hide. We can’t tell you when the market will bounce back, but we can lean on history to show that times of stress have primarily turned out to be opportunities in disguise.” Moreover, she says that it is during bear markets where you as an investor will: “likely make some of the best or worst decisions in your investing journey.” Therefore, “trust the numbers, not your feelings.”
Bear comes after bull
A market is referred to as a bear market when it is trading 20% below its recent high. As uncomfortable as it may be, a bear market is part of the general market cycle. You can’t have a bull market without eventually having a bear market.
Our most recent bear market occurred in 2020 when the Covid-19 pandemic hit the world. The S&P 500 dropped more than 30% in value, however, the recovery was extremely quick, making it the shortest bear market in history.
What do we know about recessions?
The US has gone through 11 recessions since World War II. eToro Global Market Strategist Ben Laidler explains that on average, these recessions have lasted 10 months “from peak to trough.” He explains that it is usually the Federal Reserve raising interest rates, as is happening now, which causes the recession. “This drives the adage that ‘bull markets don’t die of old age but are killed by the Fed.’ This leads to a shallower and less damaging recession than one driven by financial crisis and high leverage, like 2007.”
What about your goals?
Like other situations in life, when tragedy or difficult times occur, anxiety can sometimes cloud your judgement. You aren’t sure what to do next. Therefore, it is important to stress the importance of delineating clear investment goals before you start investing.
Cox comments that bear markets are a time that “remind us how valuable it is to set buy and sell targets on your investments.” When you have certain targets and goals, you know what you are trying to achieve and it helps you to navigate through difficult times.
How about some optimism?
Since 1950, the S&P 500 has dropped 10% or more — 33 times. These plunges happened during financial crises, wars, pandemics and humanitarian emergencies. Despite that, the average yearly return on the S&P 500 IS 8%. The lesson is: don’t get caught up in the difficulty of the moment. The market falls, rebounds, falls again and rallies even higher. The story of the market is an upward trajectory, so make sure you don’t get too upset during the pitfalls along the way. And bear in mind that the down times along the way can sometimes last longer than planned.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.