Lessons from Bear Markets for Today's Investors

The stock market is experiencing significant fluctuations, leaving investors uncertain about the future. The recent turmoil has sparked discussions about whether we are entering a bear market, reminiscent of historical declines such as the dot-com crash and the downturn of the 1970s.

Market instability escalated following U.S. President Donald Trump's announcement of widespread tariffs, leading to panic among investors. In early April, the F.A.Z. index experienced a staggering drop of over 14% within just three trading days, with the DAX suffering its largest opening loss in history at more than 10%.

While the markets showed signs of recovery, the F.A.Z. index remains down by approximately 11% from its peak in early March, which is approaching the threshold for a bear market, defined as a decline of 20% or more. The situation mirrors trends seen in the American S&P 500 index, which briefly dipped into bear market territory before recovering somewhat.

Despite the current recovery, concerns linger as the tariffs remain a looming threat. The concept of 'fair trade,' as perceived by Trump, continues to dominate discussions about the global economy. Investors are left wondering if a new bear market is on the horizon. Historically, bear markets often emerge when negative global changes are underestimated and market expectations are overly optimistic.

The gap between expectation and reality is crucial, and while there hasn't been a significant euphoric sentiment in recent months, the demand for stocks has surged since the crisis of 2022. The S&P 500 saw a remarkable increase of 70% from its low in October 2022 to its peak in February, placing it among the top five percentage increases since 1930.

In light of recent stock declines, many analysts express optimism, highlighting potential opportunities and suggesting that investors who sell now may regret their decision in the near future.

Bear markets typically do not begin with sudden crashes. For instance, the bear market from 1968 to 1970 unfolded over several months before significant losses occurred. In contrast, the bear markets of 2000 to 2002 and 2009 featured more abrupt declines. If we are indeed sliding into a bear market, the current significant declines may appear moderate compared to historical precedents.

In previous major bear markets since 1968, a swift start was common, though the current decline has not reached the depth of earlier downturns. This presents a glimmer of hope, as bear markets often conclude more rapidly when the initial drops are severe. Nevertheless, it remains uncertain how low prices may fall, as previous bear markets have witnessed declines ranging from 25% to 50%, with durations varying significantly.

Excluding the extraordinary pandemic-related crash of 2020, which was influenced by unforeseen circumstances, each bear market has its unique context. The bear markets from 2007 to 2009 were marked by the Great Financial Crisis, while the downturn in 2000 was characterized by overinvestment in internet companies.

Those looking for historical parallels might find echoes of the 1970s in today's economic climate. Tensions surrounding global trade, particularly with conflicts in regions like Gaza and Ukraine, have created a fragile international landscape. Additionally, the dot-com crisis serves as a reminder that technological advancements can lead to market overvaluation.

The question for investors now is how to respond. Historically, U.S. Treasury bonds have outperformed stocks during periods of crisis. However, recent events have shaken confidence in U.S. debt instruments. In contrast, European markets may present opportunities for a more defensive investment strategy, suggesting that it might be wise for investors to reassess their portfolios and consider divesting from underperforming stocks.

Gold has consistently performed well during bear markets, while Bitcoin's correlation with stock performance remains evident. As the trust in the U.S. dollar wavers, investors may explore alternative assets such as trend-following funds. Ultimately, the approach an investor takes will depend on their time horizon and risk tolerance.

It is essential for investors to evaluate their portfolios to ensure they are well-positioned to withstand potential downturns, especially if younger generations can afford to ride out the volatility. As the market dynamics evolve, a careful assessment of individual stocks becomes imperative.