WHAT HAPPENS NEXT?
It’s easy for every bear market to seem like the end of the world, as nervous traders anxiously eye a sea of red. But to date, every huge bust has been followed by an even bigger rally. It’s just a question of when the recovery begins.
This time around, that timing is much harder to predict. Usually, a bear market bottoms out when the Fed decides its work is done and eases policy. But with inflation rising at the fastest clip in decades, the central bank has signaled that it intends to remain hawkish for some time.
For the sake of its credibility, it has to stay the course here in terms of bringing inflation down.
In addition to raising rates, the Fed will soon begin the process of selling the bonds it bought in recent years, another mechanism for stimulating the economy. It’s never done that for very long before, which makes it harder to discern what the market response will be.
The only time they’ve really done that with intent was the end of 2018 and they abruptly and quickly stopped that as growth rolled over in early 2019.
That makes it difficult to find a helpful precedent for the bear market on tap.
In every bear market, it feels like the end of the world is near while it’s happening.
In every bear market, we get some technical analyst who makes a 1987 or 1929 analogy using an overlay chart that makes it look like we’re gonna get the mother of all crashes yet again.
But “every other bear market in history is an epic buying opportunity until the next one.
When markets become more volatile and weakness takes over from strength, we always remind investors that panic is not an investing strategy.
Don’t panic” might sound like difficult advice to follow. One way to avoid it is ensuring you have enough resources outside of the market to weather a crisis.
If you can hang in without depending on that money in the market, you don’t have to pull out at the bottom and risk missing the inevitable rebound. (Remember, past bear markets have tended to be shorter than bull markets).
Keep in mind that a diverse portfolio reduces risk, valuations are a good indicator of long-term gaining potential, and investing with logic, not emotion.
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