Dylan S. from Muncie, IN asks: Mitch, I think it’s probably fair to say that no one knows when this bear market will end. What does seem clearer is that we’re in a recession and things are likely to get worse before they get better. Do times like these call for holding a lot of cash to ride out the storm?
Mitch’s Response:
Thanks for your question! You are absolutely right about the bear market’s duration – no one knows how long it will last, or whether it is already over for that matter. The average length of a bear market is between 9 and 10 months, so if this bear market is already over, it’d be a relatively short one. And anyone who tries to proclaim the bottom is just guessing – I agree with you there.
But I do not hold the same views about holding a lot of cash right now. I always advocate for holding about one-years’ worth of cash in a savings or checking account, enough to cover all income needs and living expenses. But beyond that, I think now is a time to stay invested in accordance with your goals and objectives. Shifting to cash now means market timing – which I do not advocate – and it also means the risk of getting whipsawed if the market stages a powerful rally. My goal now is to participate in stocks’ rebound when it happens, and the only way to ensure I do so is to stay invested.
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It seems like there is no end to the current bear market. And as recession fears rise, many investors are worried about their investments and what to do next.
If you’re at or near retirement, a recession may require pivoting your retirement investing strategy. The market turbulence and uncertainty are scary—but now is the time to take action and prepare yourself for the coming months. It’s important to understand the following –
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Indeed, shifts in market direction often happen very quickly. History also tells us that once the stock market has crossed into bear market territory – which it did in June – the next 12-months return for equity investors is almost universally positive. According to Dow Jones Market Data, when the S&P 500 has fallen more than -15% in the first half of a year, it has risen an average of +24% in the second half. Being in cash means forgoing this possibility.
Another point to remember is that holding a significant allocation of cash means generating a sharply negative real return. Since the most recent inflation print showed CPI rising at an 8+% rate, cash is intrinsically worth less if it is not earning any type of return. Waiting for the economy to ‘improve’ before re-investing likely means being too late, in my view. Markets are great discounters of future economic conditions—they represent all market participants’ views on where the economy will be a year from now, not where it is today.
As for the likelihood of recession, it appears possible the U.S. economy entered a recession in the first half of 2022, which if confirmed would mark a very shallow and atypical contraction. Recessions are most accurately characterized by declining output, rising unemployment, and some level of dislocation in credit markets where businesses and consumers fail to meet financial obligations. Essentially none of these conditions were met in the first half of 2022.
Economic growth is slowing, but Q1 GDP’s negative print was largely the result of a big swing in inventories and a surge in imports, both of which detract from the GDP calculation but do not necessarily signal a sharp drop-off in activity. Manufacturing and services indices in the U.S. have yet to dip into contraction territory this year and have been in expansion mode for 25 months straight.
The past 12 recessions have also all featured rising unemployment, which we have not seen in 2022. Over the past six months, the unemployment rate has fallen from 4% to 3.6%, and the just-released June jobs report showed 372,000 new hires for the month, well above economist expectations. There are also ‘only’ 1.3 million Americans collecting unemployment today, which is 400,000 fewer than before the pandemic. For context, there were over 6.5 million unemployed Americans receiving benefits during the 2008 Financial Crisis.
You may be right about economic conditions getting worse before they get better. But from an investment standpoint, I do not think it’s a good strategy to wait until data confirms conditions are getting better. Doing so almost always means being too late.
For investors who are at or near retirement, a recession may require pivoting your retirement investing strategy. In order to do this, it’s important to understand how recessions work, how long they last, and how to potentially protect yourself and your family from long-term damage to your assets and security. We can help you with our free guide, A Recession is Coming: 6 Insights to Know Now So You’re Prepared.3
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Disclosure