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Should You Be Afraid of a Bear Market?

By Alexander Green, Chief Investment Strategist, The Oxford Club
Friday, April 29, 2016

Many stock market investors loathe the thought of the next bear market.
 
Most of them shouldn't. But a few of them should.
 
Here's why...
 
The average bear market lasts one year. However, that's just from the top to the bottom. The recovery takes a little longer.
 
According to Ned Davis Research, over the last 100 years, the U.S. market has taken an average of 3.1 years to battle back to where it was before the downturn began.
 
In other words, that 3.1-year period is one year of decline followed by 2.1 years of recovery.
 
However, stocks have sometimes taken longer to recover. Much longer.
 
The bear market that began in 1973, for example, was among the worst. Stocks didn't recover for almost 12 years. No other market downturn in the last century took so long to heal.
 
"Wait a minute," I can hear some market historians saying. "The stock market crash that began in 1929 didn't surpass that peak until 1954, more than 25 years later."
 
True. But that analysis doesn't take dividends into account.
 
Unlike the paltry 2.5% dividend yield on the Dow today, the blue-chip index yielded as much as 14% during the Great Depression. (Nor do most market analysts consider the 30%-plus deflation that occurred during the 1930s.) Including dividends, stocks took seven years and seven months – not 25 years – to recover from the crash that preceded the Depression.
 
That's a big difference.
 
Even during the recent financial crisis, the worst in the modern era, stocks staged a fairly speedy recovery. By January 2013, the stock market's dividend-adjusted level was back where it stood at the peak in October 2007.
 
Of course, long-term stock market returns are not hard constants like the speed of light or the force of gravity. There is always a possibility that future returns will vary.
 
Given this, who should fear a bear market and who should welcome one? That depends on your age.
 
If you're young and looking forward to decades of future 401(k) and IRA contributions, for instance, you should get down on your knees and pray for a secular bear market.
 
After all, if you're planning in the years ahead to regularly buy food, clothing, cars, and computers, what would you prefer, steadily higher prices or sharply lower ones? The question answers itself.
 
Yet some investors – especially young or naïve ones – expect stocks to rise steadily higher like a bank balance. Not only is this contrary to their interests, but these folks are wishing for what never was and never will be.
 
They are setting themselves up for guaranteed disappointment. And that disappointment will only be compounded if they panic and sell along the way.
 
Then all bets are off.
 
Yes, future equity returns will likely differ a bit from returns in the past. But less than you might imagine. For the patient, long-term investor, market corrections and bear markets are a blessing in disguise. Even in the most difficult circumstances.
 
History shows, for instance, that had you patiently put $15 a month in stocks beginning in August 1929 (the equivalent of roughly $220 today), within just four years you would have earned more than someone who put the same amount in U.S. Treasury bills over the same period. That's right... after just four years, during the most wrenching period of stock market performance in U.S. history.
 
And after 30 years, your portfolio would have grown to $60,000, the equivalent of $313,000 today. That's a 13% annual compounded return, far more than what investors would have earned had they switched into Treasury bills, bonds, or gold at the very top of the market.
 
Other extreme scenarios generated similar results. Take Germany and Japan following World War II, for instance. As Dr. Jeremy Siegel wrote in his investment classic Stocks for the Long Run:
 
In the 12 years from 1948 to 1960, German stocks rose by over 30% per year in real terms. Indeed, from 1939, when the Germans began the war in Poland, through 1960, the real return on German stocks matched those in the United States and exceeded those in the U.K.
 
Despite the total devastation that the war visited on Germany, the long-run investor made out as well in defeated Germany as in victorious Britain or the United States. The data powerfully attest to the resilience of stocks in the face of seemingly destructive political, social, and economic change.

The story in Japan was similar. By the end of 1945, with much of the nation bathed in radioactive fallout, Japanese stocks stood at approximately a third of their level prior to the war. Yet over the next 40 years, the Nikkei 225 Index returned more than 20 times what the S&P 500 did.
 
The lesson is this: Stocks can be – and are – nerve-racking in the short term. But over the long haul, stocks consistently deliver superior returns, throughout periods of expansion, recession, inflation, deflation, and war.
 
Good investing,
 
Alexander Green

Editor's note: Last year, the government passed legislation that could allow you to collect a "cash rebate" on nearly everything you purchase this year – a new pair of shoes, lunch with friends, even an engagement ring. Best of all, the IRS says you don't need a receipt to collect your cold, hard cash. Get the details here.



Further Reading:

Get more of Alexander's wisdom here...
 
"Panicking is for when a toddler in your charge suddenly darts into the street. It has no place in portfolio management."
 
"If you buy at some point in a bear market, even if you are a bit early, you are almost certainly doing the right thing from a long-term perspective."
 
"Bear markets are an enormous opportunity for the accumulation of retirement assets. Yet for another group of investors, they pose a serious risk."

Market Notes


THIS MAY BE THE MOST RELIABLE TREND IN THE MARKET

Many of the market's biggest trends have been broken over the past few months... but the bull market in "offense" contractors is still going strong...

Longtime readers know our stance on the defense sector. In short, our government is involved in so many foreign wars and spends so much money that it should be called the "offense" industry. And the government's spending spree in this sector has been one of the most reliable trends of the past few years.

One of the biggest beneficiaries is giant defense firm Lockheed Martin (LMT). Lockheed produces things like jet fighters, missiles, radar systems, and unmanned aerial drones. Its business relies almost entirely on government "offense" spending.

And as you can see below, this spending is showing no signs of slowing down. Shares of Lockheed have been in a steady uptrend for the past five years – gaining more than 250% in the process. Just this week, shares reached a new all-time high. Until Congress cuts U.S. "offense" spending, you can expect this trend to continue.

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