The Market’s Wild Ride

These last weeks have been brutal for investors. The wild market swings from day to day, from hour to hour, have been extremely difficult for all of us. Invested alongside of you in the very same investments I certainly feel your pain.  Even more so, I feel the pain in my professional life as I watch these markets test the resolve and financial plans of my clients.

As I write this article the decline in the stock market has been significant. As measured by the S&P 500 (a widely followed index for the US stock market) stocks were down just under 41% from their high on October 9, 2007. Amazingly, the bulk of this decline (22%) happened in the first two weeks of October, since September 30th, 2008, in the panic selling before the passage of the “rescue” package.

It’s important to remember that markets like this are temporary. Just as the good times don’t last forever, bad times will pass as well. Our natural world is full of examples of seasonality and change. Night and day, ebb and flow, cyclical movements of one sort or another characterize our everyday life, from week to week, month to month and year to year.

Technically, there are many signs that we are in the final stages of a bear market.  There is nothing but fear and panic among investors throughout the world.  Governments are struggling daily to put into place rescue programs for banks and businesses.  There appear only to be sellers in the stock markets, and although individual stocks are selling at bargain prices, there are very few buyers.  I am witnessing one of the most severe bear markets our country has experienced in the past century.  The stage, however, is being set for the next bull market. 

Because of the cyclical movements of the economy and the markets, and because of where I believe we are in this cycle, the future is actually quite bright for investors in general, and stock investors particularly. As I have discussed earlier, stocks look significantly undervalued, and this undervaluation won’t last. Once the panic quiets and the “dust” settles, valuations will become apparent, and stock prices will rise to more normal levels of valuation. And if the history of previous bear markets is any guide (and we think it is) this return to normal value levels will be quite robust.

But this will not happen overnight. While it seems to us that we are near to the end of the panic stage, there will certainly be additional bad news about the economy, and uneasy markets may remain the order of the day for some time to come. If I knew when the bear market would end we could “get out” now and buy back in when the time comes. But no one knows exactly when that might be.

While it would be tempting to attempt to sell out of the market and re-enter when the market “feels” better, I believe that is an unwise choice. As we have seen over the last several weeks, markets move quite robustly, and this applies to moves up as well as down. Looking at the behavior of other bear markets shows us the pitfalls of such a course of action. Waiting out a bear market in cash sounds like a great idea, but without a crystal ball, it is perhaps the worst possible course of action. 

Investment gains are made in just a few days out of the year.  Investors who held on through the last 12 bear markets gained an average of 32.5% in the first year following the market’s recovery.  Those who jumped back into the market just 3 months late gave up over 17% of the market’s gains. And it took an additional 1 1⁄2 years to recoup their losses.  

  Investors Who…                 After 1 year gained…            And Recovered After…

  Held on through a bear market          32.5%                                      1.5 years 
  Jumped back in 1 week too late         24.3%                                     2.5 years 
  Jumped back in 3 months too late     14.8%                                     3.0 years

 The best thing to do during a bear market is sit tight.  Even this bear market will end, and it will do so when we least expect it.  Remember, recoveries are only labeled thus in hindsight.  By the time the headlines scream ‘Recovery!’ it’s too late – investors who fled will have missed out.  Worse yet, they will have made the classic investing mistake of  “sell low and buy high,” which they know (at least in their heads) to avoid, but do anyway.

 It is extremely hard to be patient in a market like this, and even harder to be optimistic. We remain optimistic about the future of our economy in the longer term.

 Karl Schroeder

Schroeder Financial Services, Inc.
9666 E. Riggs Road, #136
Sun Lakes, AZ 85248