Bulls, bears, expansions, recessions, Federal funds rate, oh my! The truth is investing isn’t always fun. Sometimes (more often than not) it takes discipline.
As I have shared previously, market cycles often produce emotional reactions that can be unhelpful to long-term investment success. People tend to have an overconfidence in the market at its highs and a sense of fear, panic, or even despair at its lows. Instead, our aim is to apply steadfast investment principles along with a disciplined approach.
In this article I want to provide you with greater perspective on bull and bear markets, and economic expansions and recessions.
In Wall Street terms, a bear market is a declining market. A bull market is a rising market. An easy way to remember this is how the animal might attack. A bear attacks with its paws striking downward. A bull attacks upward with its horns. Though people often talk about the financial markets and economy synonymously, they’re different. First, the economy is far more encapsulating. Second, the financial markets are often more anticipatory of where it believes the economy is headed.
An economic expansion is a cycle of growth for the economy. In contrast, a recession can be defined as an economic decline of trade or activity for at least two consecutive quarters (six months or more).
Link to Putnam Investments’ “Bull Markets versus Bear Markets”
While past performance doesn’t indicate future results, I thought Putnam Investments’ piece entitled, “Bull Markets versus Bear Markets” could provide you with greater historical context. Notice the top of the graph with red or green circles indicating economic recessions or expansions. Then notice the spike graph of green or red indicating the size and length of past bull or bear markets. Lastly, the yellow bar graph provides an overlay of the Federal Funds rate (what has recently been increased by the Federal Reserve).
Here we see a few takeaways. Upward markets (bull markets) can begin during or exist through recessions. The timing of economic expansions and rising markets or economic recessions and market declines do not operate in tandem. They would be impossible to time.
You’ll also notice that the Federal funds rate has increased (and decreased) during bulls, bears, expansions, and recessions. A rising Federal funds rate is not in and of itself an indicator of what the economy, market, or investments, will do.
Lastly, at least historically, the size of bull markets has always been larger and longer than bear markets.
On the second page of the piece you can see another illustration that highlights the performance of the S&P 500. Though the S&P 500 is a stock market index and cannot be directly invested in, it illustrates a part of the financial markets. Pictured is the hypothetical return of staying invested from 12/31/2006 to 12/31/2021. Compare that to what missing the 10 best days in the market would have produced. Or even more, the best 20 days.
Since bulls, bears, expansions, recessions, Federal funds rates, and the greatest performing days of the market can all act independently, it shows how difficult (impossible) it can be to time the market and pretend to know when the best time to get out and get back in can be. As the illustration shows, a person may be better served by staying invested.
While market declines aren’t fun, they are a necessary part of investing. If we aim for long-term success we will experience them. The key to getting through them is having a disciplined approach and relying on facts, not emotions.
Sojourn well,
Sean M. Williams, CFP®