A sudden change in the stock market and in our portfolio is not fun.  In fact, it is downright scary.  With people being laid off, furloughed, or just not able to go to work, it is a difficult time.  Stock market[1] downturns of this magnitude (>20%) are called bear markets, and they happen about once every nine years.  Thirteen of them have occurred in the last 120 years, including the one that we are currently experiencing.  The last one occurred starting in 09/2008 and ended in 02/2013.  Examining history, since the great depression, the number of >20% downturns, or bear markets, is seven, and the average duration is about 37 months.  We often say, "This one is different", and in reality, all market downturns have been different, but all have come with some triggering external events.  Here are the last seven, starting with the great depression.

1. Wall Street Crash of 1929 triggered the great depression.

2. 06/1962 - 08/1963.  Known as the Kennedy slide of 1962, it came after seeing the stock market experience decades of growth after the great depression.  Amazingly, there were no >20% downturns from the end of the great depression until June of 1962.

3. 05/1970 - 02/1972.  This downturn was the result of Vietnam jitters along with the increased spending from the 1960s, primarily, the Great Society started under President Johnson. Interest rates rose, exceeding 9% by 1969 as the Federal Reserve tried to combat inflation.

4. 02/1974 - 06/1980. This stock market downturn was a double-dip recession as the S&P dropped below the >20% market twice during this period.

   02/1974 - 09/1976. This first stock market decline was triggered initially by the events of August 15, 1971, when the United States unilaterally terminated convertibility of the US dollar to gold and ended the Bretton Woods system of monetary management[2]. There were an additional series of economic measures undertaken by United States President Richard Nixon in 1971, in response to increasing inflation, called the Nixon Shock, essentially triggered the start of this downturn. The OPEC oil embargo increased the price of oil and gasoline in 1973, leading up to this two-year decline.

   10/1977 - 06/1980. The second stock market declined was the result of slow growth and high inflation, also known as stagflation. The CPI (consumer price index) increased by roughly 10% during this period, but real earnings grew by just 3%. So, the real growth during the time 1977 to 1980 was negative.

5. 10/1987 - 06/1989. Black Monday came on October 19, 1987, when a mostly unexpected decline of the stock market struck the global financial market system. According to the web-site Investopedia, "While there are many theories that attempt to explain why the crash occurred, most agree that mass panic caused the crash to escalate[3]"

6. 03/2001 - 04/2007. The Dot-com bubble is one of the all-time most significant stock market bubbles. By any valuation, the stock market was significantly overvalued, but that didn't hinder investors from continuing to drive up the price of stocks. The then Federal-Reserve chairman Alan Greenspan referred to this phenomenon as irrational exuberance. The extreme nature of this overvalued market caused the market to begin to fall in 2000, but it wasn't until after 9/11/2001 that the market crossed and held below the >20% downturn line.

7. 09/2008 - 03/2013 The Great Recession is the most substantial downturn to occur since the great depression. It also followed the longest of the >20% downturns, the Dot-com bubble. During these five years, the S&P fell by 54%. Between the Dot-com bubble and the great recession, the lost decade is the name given to the 2000s. There are many reasons given for this downturn, but the debt-fueled housing bubble blew apart spectacularly during this bear market [4] and probably was the main driver for this downturn.

Why am I looking back at history? A famous quote (from an unknown source) is, "History Does Not Repeat Itself, But It Rhymes". We can't guess the future, but we can know the past. If the past doesn't scare you, why should the future?

So, what are the opportunities?

1. Bear markets don't come around very often, and neither do the buying opportunities that accompany them. If you were to buy the market[5] immediately after entering bear market territory (defined as drawdowns >20%), you would have yielded an average compounded return of 11.7% over the ensuing three years[6].  Worst case, over the six bear markets since 1950 is 4%, which isn't bad. Hey, at least it's a positive return.

2. Better yet, is to dollar cost average across the bear market. To do this, continue doing what you are probably doing already. Just keep putting money into your 401(k), IRA, or 403(b). Dollar-Cost Averaging through three years of a bear market has an overall return of 9.3% historically, and the minimum performance over the bear markets since 1950 is 6.6%.

3. So, do you currently have money in an IRA? During a bear market is a great time to convert that to a Roth IRA. When the market comes back, that money can grow tax-free, and you will never have a required minimum distribution. Let's say you have $50,000 in an IRA, and you want to move that into a Roth IRA. You, of course, will pay federal and state income tax when you do that conversion. After the 20% drop, that IRA is now only valued at $40,000. That means that your federal and state taxes will now be 20% less also. If you are in the 22% federal and 5.7% state tax bracket, converting now will save you $2,770 in taxes!

4. This next opportunity requires almost no work on your part. By simply rebalancing your portfolio, you will purchase more of the market with money that is currently in the bond portion of your portfolio. For example, your portfolio of 60% stock mutual funds and 40% bond mutual funds, after a 20% downturn, is now a portfolio of 54.5% stocks and 45.5% bonds. By rebalancing, you purchase more stock while the market is down, with money that is in the less volatile bond funds. When the market recovers, you experience growth of the stock funds, which now include more shares than before the bear market.

5. Another less obvious opportunity during a stock market decline is to help others, through generosity. Many people are hurting during this crisis. If you have plenty, you have a chance to use what you have, to help others. If you are able, don't forget to be generous during this challenging time for others.

Would you like to explore any of these opportunities? Please give me a call at (316) 535-0750, text me, or email me at lyndon@leadingedgefp.com. You can also schedule a time for us to talk.

https://calendly.com/leadingedge/financial-planning-discovery

[1] The stock market data is from, Stock Market Data Used in "Irrational Exuberance" Princeton University Press, 2000, 2005, 2015, updated.

[2] Bretton Woods system - Wikipedia. https://en.wikipedia.org/wiki/Bretton_Woods_system

[3] Black Monday - Investopedia https://www.investopedia.com/terms/b/blackmonday.asp

[4] Bear Markets in Modern Times - Motley Fool https://www.fool.com/investing/general/2013/02/25/bear-markets-in-modern-times.aspx

[5] You actually cannot buy the market, but you can buy mutual funds and ETFs that invest in a way that tracks the S&P 500 index. Since you pay a management fee out of this investment to the management company, an S&P index funds or ETFs (for example, ETF ticker symbol SPY), may not precisely track the S&P 500 index.

[6] 11.7% is the mean, and 4.0% is minimum, calculated based on the last six bear markets, between 1950 and 2020. The mean and minimum include reinvesting all dividends.