By Dale R. Berg
As an investment advisor, I typically focus my attention on the stronger bull markets, not the weak bear markets, because I want my clients to consistently see positive results in their investment portfolios. But there are times when positive results can turn negative, and the fourth quarter of 2018 was a period when the bull turned into what some thought was a bear.
In the last quarter of 2018, many market analysts and economists predicted that we were entering a bear market – the financial media even declared that we were officially in a bear market. But we were not! A bear market is defined as a 20% stock market decline over an extended period. The market decline that occurred in the last quarter of 2018 was a very unpleasant experience, and investors endured a decline that was deep and sudden: From October 1st 2018 to December 30, 2018, the S&P 500 Index suffered a 567 point sell-off, or a decline of 19% from peak to trough. Apple stock, for example, the beloved US tech giant of the Nasdaq exchange, lost $400 billion worth of market capitalization in 60 days of trading.
THERE ARE TIMES WHEN POSITIVE RESULTS CAN TURN NEGATIVE.
Fear was the major theme behind the selloff – fear of recession, of trade wars, and of slowing growth. Yet the economy was strong, unemployment was at its lowest level in decades, interest rates were not headed higher, and consumer optimism was high. So was this sell-off the beginning of the bear market many were predicting? No, it was not. It was simply a market correction, which is a quick market downturn of 10–20% from the 52-week high, led by fear and sentiment, not by economic fundamentals. A market correction is typically characterized by a period of extreme volatility and panic selling. Typical media reporting about “doomsday” events fuels market volatility. We may see daily market fluctuations of 1–3% to the downside, led by large upside swings, with the market lows eventually becoming the new market highs over a few months.
The market correction in the fourth quarter of 2018 was propelled by Apple’s decision to no longer divulge iPhone unit sales in its quarterly reports. Investors digested this news and speculated that Apple was no longer the profitable and dominant industry player it once was. The market’s negative sentiment toward Apple was the “virus” that gave the stock market a “cold” and spawned the correction.
WAKING A SLEEPING BEAR
A bear market, in contrast, is a slow decline that has no particular catalyst and is not necessarily linked to a recognizable event. It’s a much longer period of rolling market downturns, typically 1–3% per month, and it usually doesn’t commence with a major sell-off of equities (stocks). A bear market is a result of a slowing economy, rising or high unemployment, and slowing economic growth. It is the fundamental overall change in the economy and in economic growth that typically leads to a bear market. One of the most recent and worst bear markets was between October 2007 and March of 2009, a period that came to be called the global financial crisis and that saw a downturn of 54% for the S&P 500. That bear market was 10 years ago, and I still have many conversations about it. The pain that market inflicted on investors is not easily forgotten.
What we’ve experienced since 2009 is a glorious bull market, with the S&P 500 increasing an incredible 373% since March 9, 2009. The market recovery has been wonderful, and the economy today is strong and healthy; the downturn in the fourth quarter 2018 was only a correction.
BEAR MARKET DURATIONS
But there is always a bear in the woods. Between 1900 and 2018, there were 33 bear markets, with an average of one every 3.5 years  and lasting an average of 16 months. No one can predict the market, the main reason many economists were predicting that the 2018 downturn was the beginning of a bear market is that many believe we are “due” for such an event.
If a bear is indeed lurking around the next corner, what should an investor do now?
Here are five tips:
1. Do not attempt to predict the beginning of a bear market because you will be wrong. By the time an investor is confident about the status of the market it’s probably already too late to make any meaningful adjustments to the investment portfolio.
2. Make sure you are comfortable with your current asset allocation to cash, global bonds, real estate investment trusts, international equities, emerging market equities, US equities, and Canadian equities. Proper diversification will provide support and a cushion to the market downturn.
3. Pay attention to the style tilt of your portfolio (the balance between types of stocks). Statistically, growth stocks (securities with high price to earnings ratios) will experience larger declines than value stocks, which have low price to earnings ratios. This pattern was especially true during the 2000–02 bear market, when many value stocks that had been beaten down by the technology bubble experienced sizable price increases.
4. If a large planned portfolio withdrawal is imminent, protect that portion of the portfolio by reducing its risk sooner rather than later.
5. Stay invested throughout the bear market because they never last forever, and a new bull will emerge without warning.
 James Chen, “Bear Market,” Investopedia, May 15, 2019.
Dale R. Berg is a Senior Financial Advisor with Assante Financial Management Ltd. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources; however ; no warranty can be made as to its accuracy or completeness. Please contact him to discuss your particular circumstances prior to acting on the information above. The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd.
First published in the September 2019 edition of The Business Advisor.