US stocks are flirting the bear market territory. The first three quarters of 2022 ended with all leading indices posting losses. And, the outlook doesn’t look any bright well into 2023. S&P 500, Nasdaq 100, and Dow 30 are all down by over 20% over the last 12 months, with the major meltdown in prices seen from January this year.
As an investor, it is important to know why is the market falling and what to do in the market now.
The crux of the matter is that the 2022 US stock market crash began with inflation and till the US Fed tames the price rise, which it is doing by hiking rates, the bulls may stay away from Wall Street.
When the stock market index declines by more than 20% from peak to trough, it is referred to as a bear market. Although the 20% threshold is arbitrary, the stock market gives it a lot of significance. Equities are volatile and the stock market is not a one-way street and will never move in a linear fashion. Although equities tend to drift upwards over the long term, there are dips, corrections, and even market crashes in-store during an investor’s stock market journey. Corrections are somewhat less painful as the recovery time is measured in months but a bear market recovery time is measured in years.
It’s important to note that there is no panacea for bear markets. If your stock portfolio is in red and prices are still moving down, there’s not much you can do.
Even dip-buying may not help unless there a reversal looks imminent in near future and even selling off could be financially damaging. When an investor sells investments when the market declines, they not only lock in otherwise-temporary losses but also prevent their assets from fully benefiting from the market recovery and any future profits. A bear market may compel unprepared investors to drastically reduce their investment portfolios.
You need to stay the course and follow the principle of ‘Not timing but it’s the time in the market that counts. Easier said than done, even the most patient investors may be forced to sell at bear market levels if they are living off of their assets. Panic is the greatest risk that investors confront during a bear market.
Bear markets are terrible, but they are also brief. The goal is to stick to your plan, so resist the impulse to alter your portfolio’s risk profile or make significant moves into or out of cash or equities.
The day the bulls in the markets get a whiff that inflation is cooling, bond yields are falling or the dollar index is weakening, a reversal could be expected. The real impact of the rate hikes on corporate earnings will also remain a crucial factor to watch out for. For long-term investors, all these factors may not be as important as they look; staying the course is the best investment mantra for them.