MOSCOW – A bear market indicates that the market is down more than 20%, however, it is not something that the average investor should fear.
In June, we were in a bear market but managed to break free for the following summer months. Now we are feeling the heat again as the S&P 500 is currently down 24%. It is important for the common investor to understand that historically, there is always light at the end of the tunnel during these downturns.
Edward Jones Financial Advisor, Beau Melton explained that individuals currently invested in the market are likely seeing their account values are down right now, however, they still own the same number of shares. If individuals do not sell during these times, they will not lock in the losses. Historically, market downturns such as this are actually one of the best times to invest as prices are lower.
“If you are looking to make an investment in a new shirt, you are not going to be going in to buy it when it is full price,” Melton said. “You are likely going to be going in when it is a 20% off Black Friday sale. The same applies to investments.”
Looking back at history, since 1971 there have been eight points where consumer confidence has hit a low point, and the following 12-month return was on average 24.9%. Meanwhile, after the eight high points that followed, the 12-month return was 4.1%.
History also tells us that the market is forward-looking. Melton explained once we start getting positive news and indicators that the market is doing better, things will turn around.
“We don’t need a full economic recovery for the market to start seeing recovery,” Melton said. “We just need to start seeing some steps in the right direction.”
The biggest issue in the market currently is the battle of inflation. Currently, the inflation index that tracks price increases across different sectors of the economy is raising at an alarming rate. Usually, this is around 2-3%. In August, the latest numbers showed headline inflation (including food and energy costs) at 8.3%.
Melton mentioned Inflation is one of the key drivers in this current economic environment, and the easiest solution is the series of Federal Reserve rate hikes that we have seen over the past few months, however, this is not an overnight fix. In September, the Fed raised interest rates by another .75 basis points. This is the same as the aggressive hike they chose the previous month.
“It is likely the federal reserve will need to see a few months of improving inflation numbers before they pivot,” Melton said. “It will eventually get under control. Initially, we are seeing prices come down on those large purchases like homes and cars. Interest rates on the loans have gone up which makes demand go down.”
We are starting to see how the hikes are working slowly but surely. Headline inflation decreased .2% over last month. However, core inflation, which is excluding food and energy, went up from 5.9% to 6.3%. For the average consumer, this means we are still seeing areas where prices are increasing.
For more information on this topic, call Edward Jones Financial Advisor Beau Melton at (208) 882 – 1234 or walk into his office at 609 South Washington St. Suite 203 Moscow, Idaho 83843
“The author of this article and Edward Jones have an existing business relationship. This article is not an endorsement or testimonial of the services provided by Edward Jones Financial Advisor Beau Melton.”