A recent article in Advisor Perspectives discusses how investors can protect themselves from a bear market (defined as a 20% or higher decline in stock prices).
The article offers the following advice: “Run from recessionary bears and stand your ground against others.” As the bull market continues, it says, many a watchful eye are focusing on the yield curve, economic data or “anything to try to get an edge on when to exit the stock market before the next bear market and recession.” Citing S&P 500 data going back to 1957,” the article notes that there are two distinct types of bear markets, traditional and “bear cubs–” the former occurs during an economic recession and can significantly “damage one’s financial condition as they tend to lead to emotionally-driven and counterproductive investment decisions.” The data showed that, since 1957, there have been six of these bear markets that lasted an average of 20 months and took four years and seven months to break even (suffering a loss of 39.8% from peak to trough).
The other, “bear cub” markets, those that occur outside of a recession, are the ones that investors should “firmly stand your ground against,” the article warns, noting that during the same time period the S&P 500 showed only three non-recessionary bear cub markets that lasted an average of six months and broke even within a year and seven months (suffering a 27.9% loss from peak to trough).
“The difference between these two types of bear markets is apparent and stark,” the article asserts, adding, “Stock market investors should avoid staying invested during traditional bear markets and ride it out during bear cubs.”
But how can an investor differentiate between the two? Given the current level of focus on the yield curve, the author analyzed data from the Federal Reserve dating back to 1976 to determine how the yield curve has behaved relative to stocks. “In that timeframe,” the article reports, “there were four total bear markets—three traditional and one bear cub. Every one of the traditional bear markets was associated with a yield-curve inversion. The bear cub, conversely, was not. This further suggests in the absence of a yield-curve inversion, investors should stay the course during troubled markets that are non-recessionary.”