What We Can Learn From the Almost Bear Market of 2018

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In late October 2018, the stock market dropped precipitously. From its recent all-time high on September 20 to its close on October 29, the S&P 500 Price Index was down -9.88%.

At the time, many suggested that you should get out of the markets immediately. (Alas, someone is always recommending that.) Articles warned that a Bear Market, a recession, or even a crash was “inevitable.”

Wiser investors realize that jumping in and out of the markets is a foolish investment strategy. At any point you don’t know what direction the market will move next. It could go lower and dip into a Bear Market. It could rise into a Bull Market. We could have a recession. We could have an expansion. Although unlikely, a crash is always possible.

From October 29 until 56 days later on December 24, the market dropped an additional -10.99%. This was a correction down -19.78%, just shy of the definition of a Bear Market, from the September 20th high.

Many headlines, even as of January, are touting that we are in a Bear Market. This statement is, at least currently, false. Investors that are following the advice of the Internet are sadly keeping their money out, waiting for the bottom of a Bear Market that may never come.

As of the close yesterday (January 9th), the market is up 9.95% from the Christmas Eve bottom. The market is approaching the October values that inspired many to first get out of the market. Others got out of the market at lower values which the market is already trading well-above.

The black dot in this graph is the October 29th value. The blue mark is the place where January 9th value has already recovered.

S&P 500 10/29/2018

You can always measure how far the markets have fallen from their all-time high. However, if you try to measure how far the markets have risen from their all-time low, it is impossible. The percent gain from the all-time low is nearly infinite. The markets have been appreciating for the past 200 years, albeit with some major corrections, Bear Markets and even a crash or two.

I’ve heard many investors say, “Well, the markets can’t just go up forever, can they?” To which, I would reply, “They have so far, haven’t they?”

Obviously, I am publishing this article before we find out what happens this time. The market might go lower into a Bear Market, but at some point in the future, I feel confident the stock market will be at levels that are double what they are now. Jumping in and out of the markets risks investors under performing the very markets they are invested in because they will sell after the market has gone down and refuse to get back in until the markets are trading at values higher than when they got out.

To make the strategy of jumping in and out of the markets successful would require a precision only achieved by luck. In contrast, staying invested and diversified requires resolve not luck.

Photo by Jf Brou on Unsplash

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President, CFP®, AIF®, AAMS®

David John Marotta is the Founder and President of Marotta Wealth Management. He played for the State Department chess team at age 11, graduated from Stanford, taught Computer and Information Science, and still loves math and strategy games. In addition to his financial writing, David is a co-author of The Haunting of Bob Cratchit.