If you’ve been keeping an eye on the news lately, then you’ll likely have seen that the S&P500 (which tracks the 500 largest companies in the US) is now officially in a bear market, having fallen 20% since January. But why is this happening, and what does it mean for your investments? We’ll do our best to break it down for you in this article.
You may also want to read: What is a bear market?
Why are we in a bear market?
Since the start of the year, the world has seen significant inflation which has sparked a ‘Cost of Living Crisis’ with the costs of goods and services rising faster than those of wages. This has resulted in rising forecasts of steep interest rate hikes from major Central Banks, which simply adds to the problem we’re facing by making debt, including mortgages, more expensive.
Inflation data (measured as Consumer Price Inflation or CPI) has been higher than expected, but most Central Banks do not focus on CPI, and with good reason, as CPI can be vulnerable to supply shocks which cannot be altered by raising interest rates. In the USA, nearly a quarter of US CPI is in disinflation or outright deflation in areas where monetary policy has an impact.
In addition to this, we’re still waiting on May’s producer price inflation (PPI) data which provides a measure of inflation at the wholesale level of the economy rather than just the end-user. The overall consensus is that this figure is likely to show stability, which means that any policy tightening by the Federal Reserve or other Central Banks will be more measured.
What does a bear market mean for my investments?
Seeing major stock indexes like S&P 500 in a "bear market" can be worrying, but this label has no real economic significance.
That’s because, despite what you might think, losses in the stock market don’t matter a huge amount economically. Why? Because only around 33% of Brits own any stocks and shares, with ownership generally being held by higher-income households who typically also have a good amount of savings.
That said, it can bring about behavioural changes in more risk-averse investors and companies. Interestingly, the biggest change to the economy following labels like this is more likely to come from whether or not a company will change their hiring or investment strategy following the market movement.
What about the decline in Cryptocurrency?
We’ve seen crypto implode (again) over the last few weeks, with major coins like Bitcoin and Binance losing over 20% in just 7 days and Ethereum losing over 30%.
You may be watching this and wondering if this matters, or will it impact your investments with Wealthify? The short answer is ‘No’.
We currently see Crypto as a gamble, rather than an investment. This is important because the economics of gambling losses are different from investment losses. There is a potential benefit if the labour and resources being used by cryptocurrency are transferred into more economically useful sectors.
To understand more about our approach to Crypto, we’ve detailed it all in our blog “why we don’t invest in Bitcoin.”
What should I do with my investments?
At Wealthify, we can’t give you advice, but we can share some common knowledge.
For example, investing is generally something you do for the long-term, and you aim to make money by buying when the price is low and selling when the price is high.
If you bought at a time when the price was higher and now you want to sell when it’s lower, you will make a loss. But if you need that money urgently, then it is an option that’s available to you.
The other alternative is to wait. Markets rise and fall – just look at 2020, we saw the markets drop dramatically in the first half of March. But this didn’t last. By the end of the year, the market had rebounded and even went on to set new records.
While that recovery was very quick for a bear market, it’s also worth pointing out that no two bear markets are the same. They are often caused by different things, which means the recovery is likely to be different too. However, according to data, the average length of time it takes to hit the end of a bear market is 95 days.
Can you make money investing in a bear market?
Yes. Even if you simply do nothing.
We’ve previously talked about how doing nothing is making an active choice – even if that choice is not to sell at a loss.
But just because the overall trend of a market is down, it doesn’t mean that you can’t make money from it. In these cases, it’s all about identifying opportunities, making tactical purchases while prices are undervalued, and having a well-diversified portfolio.
One of the easiest ways of doing this is through pound cost averaging, as it removes the emotion from the decision and you can do it with Wealthify simply by setting up a direct debit. The strategy of pound cost averaging also gives you the opportunity to pick up potential investment bargains that could help you realise larger gains in the future.
Taking this approach in the long-term can help to reduce the fluctuations you see during your investment journey, and it could also help you snap up some cheap investments along the way too.
With investing your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
- Comment from UBS https://www.ubs.com/uk/en.html
- https://coinmarketcap.com/ - values correct as of 14/06/2022
Please remember that past performance is not a reliable indicator of your future results.
Wealthify does not offer advice, if you’re not sure whether investing is right for you, then please speak to a financial adviser.