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The Latest Bear Correction: Come on Feel the Noise…

For much of this year, the headlines have been filled with doom and gloom.  The pages and airways declared that the economy and stock market are falling apart.  There’s noise everywhere.

But, the reality is that the latest downturn is just a normal part of our economy and financial markets.  The dynamic nature of capitalism often masks the cyclical behavior of both U.S. and international economies.  Because these cycles can take years and decades to play out, it is frequently difficult for many people to see beyond what’s happening in this moment.

What we're are experiencing right now is only a temporary decline—and they always are—within the long-term and permanent advance of our economy and the world financial markets.

These declines are very real and intense when they are happening.  And I do not mean for any of my comments to downplay what people are experiencing or feeling right now.  These declines are gut wrenching to say the least.

Still, it is important to keep things in perspective.  The better your historical perspective of downturns and declines, they better you’re able to understand and cope with them

Since the end of World War II in 1945, the U.S. stock market—as measured by the S&P 500 Index, has experienced 11 bear markets, which are declines of 20% or more over a period of time.1  That's an average of one bear market every six years or so.

Since our last bear market ended in March 2009 and it’s nearly seven years later, you could say that we're just about due for another.  So, it’s no surprise to see the markets going through a normal correction

Be aware that a bear market does not necessarily mean we’re going into a recession.  Nor does it mean we’re heading for a repeat of 2008.  What it does indicate, however, is just the cyclical process that markets go through every now and then.

But if you follow the headlines and sound bites, the media and the carnival barkers do nothing except exacerbate investors' fears that the world is ending.

Bad news sells!  This explains why the news is filled with an endless stream of doom and gloom—even when reality suggests things are looking good.  In selling this doom and gloom narrative, the media would have us believe that "this time is different” or there is a new “New Normal.”  Whatever that means! 

What history shows us time and time again when it comes to the financial markets that this time is never different.  In fact, the similarity between downturns from the distant past, recent past and present are fundamentally the same:  an imbalance between supply and demand.  The economy expands and then it contracts, and then it expands again.  Wash, rinse, repeat.

The truth is that with every downturn, the stock market has subsequently recovered and over time has surpassed its previous record high.   

The graph below shows the subsequent recoveries in the U.S. markets (as measured by the Dow Jones Industrial Average) since 1956:2

U.S. market recoveries (as measured by the Dow Jones Industrial Average) since 1956

In our lifetimes, we’ve witnessed the power of capitalism and how it continues to extend its reach into more and more countries around the world.  This extension means a brighter long-term outlook for stock ownership.

Amidst all this noise, prudent planners and some advisors continue to stick to their disciplined and empirically-validated approach to creating wealth: broad and deep globally diversified and low cost portfolios.

These prudent professionals know that instead of trying to second-guess the market, investors can harness the information to build diverse portfolios based on the factors that drive higher expected returns.

These portfolios are designed and built purposefully to withstand the normal market cycles that we are now in and will forever more experience.  This approach allows you to participate fully in the positive long-term results of capitalism on a global basis.  That’s what most of us need to achieve our retirement goals.




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1 Yardeni Research, Inc, Market Briefing: S&P 500 Bull & Bear Markets & Corrections, Feb 12, 2016.
2 Capital Group. Represents average of the annualized total returns of the Dow Jones Industrial Average with all distributions reinvested over the 10-year periods following the 11 bear markets.

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