The S&P 500 dropped lower last week and temporarily sank into bear market territory (a 20% or more drop) which spurred headlines about the U.S. entering a bear market. If you look at intraday highs and lows, the S&P did temporarily enter a bear market with a decline of 20.9%. However, many professional investors specifically use the daily closing price as the basis to calculate a price movement and this calculation only yields a 18.6% drop, which currently is not a bear market. Indeed, this is splitting hairs and it’s important to remember that all these price levels and names should be viewed with some wiggle room. There have been many occasions where the S&P was down 20 – 22% but really didn’t fit the true meaning of a bear market. In my experience and research, a true bear market is a combination of a drop of over 20%, with the drop and subsequent market rise to new highs lasting a year or more in duration, and the economy suffering a recession. I believe we still need more time and data to decide what type of market we are currently in.
When the market is down 20% or more, you should consider investing extra cash, and this time is no exception. The market may still head lower from these levels but it’s extremely difficult to buy exactly at the bottom, and in the long run buying at these price levels will most likely yield good returns. Most investors fear purchasing stocks while the market is dropping and don’t buy stocks on the way up precisely because they only want to purchase at the exact bottom. This is one of the greatest investment mistakes that most investors don’t even realize they are making, and now you don’t have to.
Photograph by: Sharon McCutcheon on Unsplash
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