A bear market is when a market experiences prolonged price declines. This typically describes a condition where securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. Apart from US stocks, this bear market has almost wiped down multiple crypto assets. Crypto project such as Luna and Celcius are now facing a danger of liquidity. Many prominent firm venture capitalist such as Chamath Palihapitiya is now saying that he expects the bear economy to last for 12 to 16 months. It’s July 2022, the global stock is facing 2 quarters of negative return and people are asking how long this bear market will last? Where is the light at the end of the tunnel?
One can say that this recession may be caused by the Russia Ukraine war that happen back in February. However, looking back over in 2020, we failed to notice the supply chain disruption that has been affecting us for over 2 years. 2 years of slow economic activity has lead businesses to raise prices, causing rising cost of living. Hence, inflation is quite overblown in many parts of the country around the world. In the US, the CPI (consumer price index) shows an inflation data of 8.6% in June 2022. Inflation is so bad around the world that Turkey is now at 80% inflation in June and Sri Lanka is now declared bankrupt. Recovering the supply chain disruption is going to be slow, as the world is now opening up and resuming productions.
To keep rising inflation at bay, the FED increase it’s interest rate lower the velocity of money in the market. In simple terms, the FED is attempting to force money supply in the market to lower. This would make the currency stronger and pricing will be more stable. However, until inflation is showing signs of slower growth, the economy will remain bearish.
What is the current market cycle right now
Knowing the current market cycle will give you as an investor an edge on what to do with your money.
This graph represented the 4 quadrant framework that Charles Gave created to determine the market condition. the Y-axis determines the price while the X-axis determines the Economic activity in the current market. The 4 quadrant represents the different states of the economy market which are disinflationary bust, disinflationary boom, inflationary bust and inflationary boom.
Disinflationary Boom (Bull Market)
Throughout the 20th Century, the FED (Federal Reserve System) has been stimulating the economy by printing more money. The intention of this is so that the economy would be running in a disinflationary boom. As the FED aims to keep prices low with low inflation of 2%, economic activity would be competitive and still be able to do well.
Inflationary Boom (Bull Market)
In 2020, as the FED is forced to print more money to stimulate the economy further, a total of 3 trillion dollar was printed and pumped into the economy in a bid to kickstart recovery. However, because of the rapid money printing, inflation became overblown. Which brings the economy into the next quadrant, which is inflationary boom. To put it into contrast, 1/3 of the total amount of stimulus was printed in 2020. Yes, while it is true economic activity were at a boom, the value of currency is losing it’s value.
Inflationary Bust (Bear Market)
This put us into the scenerio we are currently in, inflationary bust. As the FED begame to shown signs of not being able to control inflation. the consumer market loses confidence in them and started selling their financial assets. The S&P500 has lose over 20% just this year alone, real estate mortgage rate shot up to 5.78% from 3%. Worst of them all, the crypto market is down more than 70%, with Bitcoin down over 52% this year.
Disinflationary Bust (Bear Market)
For the economy to recover, a disinflationary bust needs to happens. As it will bring back consumer confidence in the government in managing their asset. Consumer will flock into safer asset such as government bonds.
What to do to your Investments during this Bear Market?
While having a diversified portfolio is great. This is a year where diversification is not working – a stock-bond portfolio will see both asset classes coming down together. Going with alternative assets like crypto fared worse. Bitcoin is down 56% and Ethereum is down over 70%. It is one of the worst bear markets in history. Everyone needs to be able to navigate through this downturn and come out on top. Here are some tips on what you should do to prepare your investments for a bear market, how to stay sane and invest during this time, and what to do once it’s over.
Sleep and Forget
Often times, the best investor are the ones who do not do anything to their portfolio. A performance review by Fidelity discovered that the consumers who were either deceased or inactive provided the best returns. These are clients whose assets were either forgotten about or frozen after they passed away. This is why many financial advisor do promote the idea od DCA (Dollar-cost averaging) so that you do not have to be bothered by the daily ups and down in the market.
Start a Side Hustle
Never miss the opportunity of a bear market. As Warren Buffet one of many quote, he hope to see more recession so that he could invest more. Recession are a great time to invest into desired stock which are at a discount. So to get more money to invest, start a side hustle, here are the 10 easy side hustle to try in 2022! If you would like to know more about starting a side hustle, check out our side hustle page at Side Hustle 101.
Learn from Mistakes and Improve
Whether it is you gotten more greedy, not diversified enough or did not invest into the right stock. We have all been there. Every investor will lose every once in a while. However, it is during these scenerio one learn more about his investing style and invest it from there.
When can we see the end of this bear market?
Typically, the bear market lasts for 388days. Until we are able to see a positive sign in the market where consumer confidence comes back. Until then, I believe the economy will remain choppy. In the midtime, I will remain consistent with my investing and DCA until I have reached financial independence.