By Lewis J. Walker, CFP®
The Dow Jones Industrial Average hit an all-time high of 18312.39 on 5/19/15. On Friday, January 15, 2016, the Dow closed at 15988.08, down 12.9% from the high. The broader S&P 500 Index closed at 1880.33, down 11.8% from the all-time peak at 2130.82 on S/21/15. We've endured a correction, generally defined as a drop of 10% or so from a previous peak. Are we in a bear market?
A bear market generally is defined as a condition of widespread and reinforcing pessimism that fuels self-sustaining negative sentiment and selling as market prices fall. Interpretations vary but a drop of 20% or more in key indexes is seen as a bear market. The Dow and S&P 500 indexes technically are not in bear territory, but as analyst Mark Hulbert noted, some other averages are (MarketWatch.com; 1/15/16). The Russell 2000 Index is down 22.23% from a peak on June 15, 2015. With angst over falling oil prices, the SPDR Energy Sector ETF (XLE) is down 34.5% from a 4/29/15 peak. The Materials Sector ETF (XLB) is off 26.4% from a 2/25/15 high. The KBW NASDAQ Bank Index is down 20% over 6 months despite generally strong bank earnings. High flying stocks like Facebook, Amazon, Google, and Netflix have felt the pull of gravity. Over 46% of the stocks in the S&P 500 Index are down by 20% or more.
A few summers ago, this writer was hiking with a small group on the Lake Eva Trail in the Tongass National Forest near Sitka, Alaska. We had seen bear scat, but no bears, despite the rushing salmon-filled stream next to the upward sloping deeply forested trail. As we sat resting on logs and rocks, someone quietly uttered, "Bear!" A large momma grizzly came out of the bush, looking our way and sniffing the air. Sensing that we were not a threat, she turned and made a sound, signaling her cub that it was safe to come out. To see them jumping into the stream to snag fish was a treat.
We have a correction with bear overtones! On our hike, our naturalist leader advised, "When you see a bear, stay still, don't panic, don't run. Keep calm." As you stare a bear-like market in the face, that's sound advice. Keep calm. Don't run or panic.
In a previous column we opined that the current slump is not a 2008 replay. An opinion aired in The Wall Street Journal, 1/16/16, agreed. Citing crucial differences between now and then, WSJ gurus do not see the market downturn morphing into a "full blown financial crisis that leads to an economic one."
Mark Hulbert cited Ned Davis Research noting 35 bear markets since 1900 with an average length of 403 days. If we assume declines generally started in late May, 2015, calendar-wise, we are over half-way there (60%). In the march to potentially 20% down from its peak, the S&P 500 is 59% along the way, if it did drop another 175 points from the 1/15/16 close to reach official bear status. As Mr. Hulbert opined, "A bear market in stocks will be over before you know it."
Per the WSJ, January's trading days through 1/15/16 saw an average of nine billion shares changing hands daily, up from 6.8 billion daily in 2015. Everyone forgets, when one person or entity sells, someone buys on the other side of the trade thinking the seller is wrong. Expect guessing games and volatility to go on for a while.
You should have a sufficient bucket of cash and low risk assets to sustain your life while more volatile buckets designed for growth over time remain in place. If you can add to equities during the downturn, all the better. Timing in the short run virtually is impossible but in the long run, feeding the bear can be wise! You may be swimming upstream, but you are not a salmon in bear-feeding season!
Lewis Walker is President of Walker Capital Management, LLC. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Walker Capital Management, LLC.