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March 23, 2020

Market Update – S&P 500 in Bear Market Territory

Investment Committee

After the worst week on record since 2008 and with the S&P 500 down roughly 30% since the start of the year, many investors are asking themselves (and/or us), “Is it time to get out of the market?” We hope to provide some perspective in trying to answer that question.

Where do we stand?

We are officially in a bear market, defined as a drop of more than 20% in stock prices from the peak. According to Fidelity, the S&P 500 has experienced 16 bear markets since 1926, an average of about once every six years. When a bear market occurs, it tends to be surrounded by scary headlines and can be dramatic, with an average loss of 36% according to Ned Davis Research. While we continue to believe that history tells us that it would be imprudent to make a wholesale move into cash at this moment, not knowing where or when this will end, we continue to remain available to address your specific situation or concerns.

Academic research uniformly and consistently supports the futility of market timing. When asked to name the most successful market timer – no one can come up with a name. On the other hand, most investors immediately think of Warren Buffet when asked to name one of the world’s best investors. And what does he have to say on the subject? Simple – to be successful in the long run, you need to stay the course.

Will it go lower from here?

We don’t think anyone can predict what the market is going to do in the short run, but we do believe it is possible to know whether you’re making an intelligent purchase at a given price.

Given how quickly new lows have reached the extremes of 2008, and the sharp increases in volatility, it is far too early to conclude that equities have entered a bottoming process that will give way to a new bull market, nor can we predict when that will happen. However, since markets look ahead and anticipate future conditions, it is clear that unless the news is much worse than what forecasters are already predicting, markets have priced in much of the economic hit that lies ahead.

How long is it going to take to get out of this?

According to our research, the difference between a quick and sustainable recovery in markets will rest upon whether businesses will have access to enough liquidity to hunker down a couple quarters, whether fiscal stimulus can stabilize growth forecasts, and how quickly the COVID-19 virus is contained.

In the meantime, we can monitor the impact on economic activity, assess economic linkages that could transfer financial stress, as well as gauge how government and central bank interventions might support the economy. But, the most crucial influencing factor may currently be the speed and size of government response to determine where prices go next. The market will likely continue to decline until political figures agree to a plan and take action.

From there, it’s all about the viral caseload slowing. Although many health experts caution that with more testing in play case numbers will increase, the good news is we are one week into social distancing which should support the flattening of the curve, something all agree would be a positive sign.

Why not try to time the market?

According to Ned Davis Research, in considering the current annualized decline, we always keep in mind that four of the five global bear markets with the largest annualized declines have been followed by four of the five global bull markets with the biggest annualized gains. We have seen when bear markets give way to bull markets, there are many “false starts,” yet markets can take off with breathtaking speed. Back in March of 2009, the markets bottomed without any sign that they were about to do so. Anyone on the sidelines missed close to a 40% move over the following weeks, as well as a very attractive one-year return (below).

Should we stay the course?

One of the reasons certain investors constantly change up their investment strategy — usually at the worst possible moment — is because they don’t have the right benchmarks in place to reference or are unable to define whether they’re on track or not. Without a deep understanding of your goals from the start there’s no way to judge your investments going forward. After all, achieving your goals is the whole point of investing your money in the first place.

With that in mind, for those taking regular portfolio withdrawals, if you have 3-6 months of cash on hand and multiple years of bonds to support future withdrawals, then you should be in a good place to weather the storm. For example, if you withdraw 5% of your portfolio’s value on average and begin with 25-35% in bonds, you could go 5-7 years before needing to sell a stock – giving the market time to recover. For more aggressive investors who do not own bonds because they have no liquidity needs, you are in a fortunate position of not being forced to sell and can take advantage of when prices are attractive.

In short, history has rewarded investors for staying the course. This chart shows how fast markets have emerged from major crises in recent decades.

What will happen if I stay the course?

While there will be a severe short-term economic toll, stocks should begin to recover long before the pandemic is on the wane – which is exactly why most people will miss the initial snapback. According to the former editor of the prestigious Financial Analyst Journal, “the strongest bull markets are not built on a foundation of good news but on diminishing bad news.” Future returns are highest when fear is most elevated. It will be hard to be perfectly right on the turning point, naturally, but don’t wait for the good news or the markets will have long moved ahead without you participating.

Of the 16 bear markets since 1926, every single one of them has given way to a bull market. 100%. Why would you want to go against these odds?

The good news is that in every case, markets have come back, and often have made sizable gains in the months immediately following the downturn. The past is no guarantee of future results, but historically, even the worst markets have seen temporary dips in a general march higher for stocks. This is because most recessions, even deep ones, do not leave a lasting mark on the economy or the financial markets, nor have previous global pandemics.

We realize for many, these uncertainties create high levels of anxiety which can lead to feelings of just wanting to sell to make it stop. If you do sell, you’re likely to miss the upside when it comes. It may work for a little while as prices may fall further, but cash on the sidelines does no good if it always stays on the sidelines. If prices surge, then you’ll have permanently missed the upside, all for temporarily avoiding the downside.

Sticking to Our Time-Tested Process

It is very likely that efforts to contain the virus will have a deep impact in terms of lost economic activity. Fortunately, a massive government-issued monetary and fiscal stimulus to minimize the disruption to households and businesses will likely be employed in the weeks ahead. For that reason, the JNBA Investment Committee is holding steady in portfolios and continuing to follow our previously communicated investment process. Remember that coming into 2020, JNBA was already underweight what would ordinarily be a neutral position in equities.

While market conditions have the potential to change rapidly, our Investment Committee is constantly evaluating the markets and is prepared to act to manage risks as necessary. Our approach relies on our 40 years of experience assessing market conditions, access to institutional-level research, and our disciplined investment process. As of today, that investment process has not led to any drastic changes in overall portfolio positioning, although we have begun to very selectively buy equities as our rebalancing process dictates. Furthermore, the same rebalancing process that is leading us to selectively buy equities is also allowing us to capture valuable tax losses for clients so they will be in even better shape when capital gains appear again.

As always, if you have questions about your current asset allocation please do not hesitate to contact your JNBA Advisory Team. Thank you for your continued confidence in JNBA.

Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, LLC.

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