After two boom years of 2020 and 2021, when the S&P 500 index rallied over 16% and 26%, respectively, the market has taken it on the chin in 2022. The S&P 500 index was down around 10% year to date, as of Aug. 15, and that’s after a relatively significant summer bounce.
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At its 2022 lows, the S&P 500 was down closer to 24%. So, does this mean the worst is over and it’s time to pile into the markets? Or is there more downside ahead?
The truth is that no one can answer this answer with certainty. However, based on historical patterns, averages and sound financial principles, there are some strategies you may want to employ to make the most of the bear market of 2022. Just be sure to speak with your financial advisor because every person’s financial needs and risk tolerance are different.
Stocks Are on Sale
When there’s a 25% off sale at your favorite store, are you generally excited or scared? For most people, the chance to buy some of their favorite items at 20% or more off is a screaming deal. So too it should be with the stock market averages.
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Although you’re not likely to ever correctly time the absolute bottom of a market, buying the market index when it’s significantly lower is a great time to step in. As long as you have a long-term horizon and can afford to lose a bit more over the short-term, buying the market index on the cheap is a great way to generate wealth.
The same applies for certain individual stocks — but not all. You’ll have to do some extra research to see whether stocks that are down 30%, 40% or even more will recover, based on their earnings prospects.
Markets Historically Have Recovered
Why do shoppers get excited when their favorite stores have big sales? Because they know that prices for most goods and services tend to go up over time, not down. The same is true with the stock market when it is “on sale.”
Although prices can be volatile from year to year, over the long run, the market averages have always historically recovered. In fact, there has not been a single time in the history of the S&P 500 that it has lost money over any 20-year period. This means that even if you bought at the absolute peak of every bull market in the past, you never would have lost money 20 years later.
Although past performance cannot predict future results, historically speaking, buying the S&P 500 when it is down has been an exceptional opportunity.
Much of the Negativity May Already Be Priced In
On its surface, the news surrounding the stock market may make it seem like it’s a terrible time to invest. With inflation topping 8% in July, the Fed aggressively raising interest rates and the war in Ukraine showing no signs of slowing down, there don’t seem to be many “green shoots” for the market.
But much of the negative news surrounding the market already might be factored in. In six months, it’s very possible that the Fed succeeds in reining in inflation, corporate earnings begin to rise again and the war may be resolved. In that Goldilocks type of scenario, the market likely would trade higher.
As the stock market is actually a forward-looking mechanism, it already might be seeing through all of this bad news to a better future, which may continue to lift it off its bear market lows.
But That Doesn’t Mean Stocks Can’t Fall Further
Even if the stock market gets everything on its wish list, it doesn’t mean the “all clear” signal has been raised and prices will go up in a straight line. Even in the best of times, the market typically takes one step back for every two steps forward.
It’s entirely possible that the Fed struggles with handling runaway inflation and overshoots in terms of raising rates, strangling growth and profits. What happens next is anyone’s guess, whether you’re a market newbie or an economist with 40 years of experience. The strong July rally in the market may end up simply being a bear market bounce.
Your Best Bet? Dollar-Cost Average
Since no one can predict short-term market movements, it’s best to stick with what you do know in this situation. First, the markets have always recovered from bear markets and gone on to make new highs, even if it may take a few years.
Second, dollar-cost averaging — or investing regularly over time regardless of what the market is doing — is a way to ensure you’ll be buying more shares when prices are low and fewer shares when markets are high. Although you’ll never pick an absolute market bottom using this strategy, you also will avoid putting in all of your money right at the market peak.
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