violent plunge in the stock market this past week stoked
fears of a bear market.
far the market is merely in a correction, with the
Standard & Poor’s down about 8 percent this year
and 11 percent from its 2015 peak.
Friday, the Dow Jones Industrial Average closed down 391
points, down 2.39 percent. The S&P fell 2.16 percent
and the Nasdaq Composite sunk 2.7 percent.
stock market’s plunge since the start of 2016 is the
worst ever during the first two weeks of a new year,
fueling concerns that the market is heading into bear
market territory. Bear markets are when stocks drop at
least 20 percent and stay down for months.
foreign markets are already in bear territory, and since
stocks often hint at economic conditions to come, the
downturns have led to worries of a global slowdown and
voices on Wall Street have grown louder. A JPMorgan
strategist warned clients to sell stocks into
"rallies," or periods when the stock market
climbs. The idea: Get out during brief periods when the
stock market is friendly because there will be more
losses to come if this is a bear market, or a period
when stocks fall at least 20 percent and stay down for
loud voice: The Royal Bank of Scotland, which warned
investment clients to get out of anything except safe
a week ago, billionaire financier and currency expert
George Soros warned in a speech in Asia that the current
global environment reminded him of the "crisis we
had in 2008." That’s when a global financial
crisis took the U.S. stock market down 58 percent and
when the U.S. had a serious recession.
Friday, with the Dow down about 350 points, Larry Fink
— the head of bond powerhouse BlackRock — said in a
CNBC interview that he thinks the stock market could
fall another 10 percent and predicted companies would
lay off employees during the next few months.
comments were a surprise because typically when the
stock market is plunging, high-level Wall Street people
try to calm the fears. He did say he expects the stock
market to be up by year’s end.
far this year, the plunge in the stock market has been
stunning — the largest drop in the first couple of
weeks ever. The Wilshire 5000, which measures
essentially the entire U.S. stock market of large and
small stocks, has fallen about 7 percent. About $1.6
trillion has been lost this year.
stock markets around the world have fallen 20 percent
from recent highs.
other words, if you look at your 401(k) mutual funds or
stocks or funds in your IRA, it’s not going to be
this the real thing or a false alarm?
because prominent voices are screaming "bear
market" doesn’t mean it will happen. At the
beginning of this year, the consensus on Wall Street was
that 2016 would be a year of moderate growth in the
economy and modest gains in the stock market. Even then
the two problems that have recently unnerved investors
problems: China, which has been the engine of growth in
the world, was slowing and might slow U.S. growth too
— possibly leading to a recession.
oil, plunging from $100 to $37 a barrel last year, and
under $30 this week, was evidence of a slowing world.
Investors worry that low prices could force companies
into bankruptcy, and people with high-yield bonds won’t
get paid back. The question then could become: Will
financial companies be infected in any way like they
were in the 2008 financial crisis?
those concerns are growing, no one knows with certainty
whether the optimism at the end of 2015 or the growing
pessimism today is correct.
do you need to do?
if you can calm yourself by considering history. If you
are years away from retiring and have a target date fund
in a 401(k) plan, you have a mixture of stocks and
bonds. The bonds will cut some of your losses, but you
will lose money for a while if there is a bear market.
Maybe you think you should bail while you can. The
trouble is that you could bail like people did in the
financial crisis, and then miss the 200 percent stock
market increase that healed their money.
average bear market lasts 19 months and causes losses of
38 percent, according to the Leuthold Group. Typically
at the worst point, people think the losses will
continue indefinitely. But healing has happened after
every bear market, including after the Great Depression,
when stocks fell about 80 percent, and after the
2007-early 2009 financial crisis, when stocks fell 58
person with about half of their money in the stock
market through a Standard & Poor’s 500 index fund,
and half in long-term U.S. Treasury bonds, recovered in
less than two years. In the average bear market,
Leuthold finds the stock market climbs 48 percent a year
after the scariest moment in the decline, and 62 percent
after two years. If you look at your 401(k) and are
afraid that your fund has too much money in the stock
market, you could choose a more conservative target date
fund — perhaps one for a person who will retire soon.
Look for a retirement date of 2015 or 2020. That will
have more bonds than a fund for a 30-, 40- or
50-year-old, and those bonds should be a shock absorber
against stock market losses.
if you are about to retire?
could follow what many financial planners did for
clients in the financial crisis: They made sure that
individuals had about three years of spending money
available so they could cover expenses without selling
stocks while they were losers. That spending money could
come from bonds, a money market fund or CDs. The
planners had people early in retirement keep about 40
percent of their money in stocks and the rest in bonds.
But your emotions matter. For people convinced that they’d
be fine in a bear market, the financial planner might
have had a 65-year-old keep 60 percent of money in the