We are officially in the longest bull market in history and know that market rallies can’t be sustained forever. So, what happens next?
There are two main scenarios to think about when a market starts to unwind: market correction and bear market.
A market correction is a 10% drop from a previous high. Investors should not try to time the market. Corrections can be scary, but they are actually frequent, necessary and a normal part of investing. For example, the S&P 500 Index suffered a correction in 2016 but ended the year up 9.5%.
A bear market is a 20% drop or more from a previous index high. Bear markets are the most prolonged market deterioration measure used by investors. Officially, a bear market is declared when an index falls to those levels for a period longer than two months. In 2008, the S&P 500 fell over 20% in the period ranging from January 2008 to March 2008, and an official bear market was declared. Economic growth held up for a few months but turned negative soon after the market deteriorated. The stock market is often a leading indicator of the economy.
A recession is connected to economic slowdowns, which usually consist of two consecutive quarters of negative GDP growth. Recessions have little to do with the market itself but can have an impact on overall investor sentiment, leading to periods of market stress. These conditions usually last about 6–18 months, anything longer than that is called a depression. For example, GDP declined in the last two quarters of 2008 and the first two of 2009. This is technically what an economic recession represents. Furthermore, it is possible to have an economic recession without a bear market and vice versa.
How does this affect your portfolio?
At Sendero, we understand the importance of asset allocation and the benefits of a prudent approach to diversification. It is important for investors to be prepared for times of negative returns by setting long term goals. In addition, creating a portfolio tailored to meet your expectations and mitigate risk will help you navigate the market with peace of mind.