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3 Phases Of A Bear Market: The Difference Between 2001, 2008 And Now

By Investing.com (Francesco Casarella/Investing.com)Market OverviewJun 14, 2022 10:26AM ET
www.investing.com/analysis/3-phases-of-a-bear-market-the-difference-between-2001-2008-and-now-200625761
3 Phases Of A Bear Market: The Difference Between 2001, 2008 And Now
By Investing.com (Francesco Casarella/Investing.com)   |  Jun 14, 2022 10:26AM ET
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After yesterday's drop, the global market rout from previous months' highs is as follows (see charts below):

S&P 500 Daily Chart
S&P 500 Daily Chart

NASDAQ Composite Daily Chart
NASDAQ Composite Daily Chart

Euro Stoxx 50 Daily Chart
Euro Stoxx 50 Daily Chart

Shangai Composite Daily Chart
Shangai Composite Daily Chart

FTSE 100 Daily Chart
FTSE 100 Daily Chart

We are now technically in a bear market.

The first thing that comes to investors' minds in such a situation is that we're looking at another 2008—where, as I recall, the S&P 500 index shed 58% (more than twice the current drop).

S&P 500 Long-Term Price History
S&P 500 Long-Term Price History

However, from a macroeconomic perspective, it was a completely different situation, as the whole financial system was at serious risk of collapse. Now, despite the many headwinds, risks lean more towards a global recession.

Let's look at the chart below to analyze the current situation in depth. It displays the last two extended bear markets—2001 (orange line) and 2008 (blue line), and the 3 phases that characterized them, namely:

  • Phase 1: first decline (important but not excessive)
  • Phase 2: technical rebound
  • Phase 3: capitulation and final decline

3 Phases Of A Bear Market: 2001, 2008, 2022 (April)
3 Phases Of A Bear Market: 2001, 2008, 2022 (April)

(Please note that the 2022 line in the above chart was last updated in April, and we are now hovering right around the middle of phase one)

Source: Lance Roberts

As we can see in the two highlighted periods, although the dynamics are more or less the same, there are many differences both in terms of the magnitude of the decline and the duration of the bear market itself.

S&P 500 2001, 2008, 2022
S&P 500 2001, 2008, 2022

In the 3 charts above, we see how the 3 periods (including our current bear market) have several similarities but never identical paths.

For example, one thing we must notice about the current period is that even bonds--historically more defensive in these situations or at any rate with more limited declines--are facing a worse-than-usual drawdown. So the protection that usually helps to limit drawdowns is missing in portfolios.

Still, in every one of these bear markets, we noticed the importance of owning bonds below 6-7 years, as the longer the bond duration, the sharper the drop.

Bond ETFs During Bear Markets
Bond ETFs During Bear Markets

Source: Charlie Bilello

How To Behave In Bear Market Cycles

I am not saying anything new here. However, a couple of pointers can help long-term investors fare better in such situations (remember, I am not talking about short-term traders):

  • Accumulation plans
  • Diversification
  • Fractional entries into strategic positions
  • Smart cash management
  • Time horizon
  • Rebalancing

These are always and will always be the only elements that can build a resilient portfolio in the different situations we will face.

In my case, having kept 20% cash from last year's bull run, the idea is to make gradual entries at every 6-7 percent decline in equity markets. This is because, as of today, I have a 50% equity, which I am looking to increase in the long run, taking advantage of declines.

In the event of the S&P 500 dropping about 40% (which would imply at least a 50% drop in the NASDAQ Composite, I would end up with all my cash invested.

But what if it keeps going down from there?

In such a case, I would rebalance my portfolio and move ahead with my accumulation plans, changing my horizon for another 8 years—rebalancing periodically.

There is no perfect formula. However, there must be a strategy that you believe in and will stick to, especially when declines can undermine an investor's confidence.

I close this analysis with a question: what have you been doing these days?

  • Selling everything?
  • Buying?
  • Doing nothing?

Let us know in the comments.

"This article is written for informational purposes only; it does not constitute a solicitation, offer, advice, counseling or recommendation to invest as such it is not intended to incentivize the purchase of assets in any way. I would like to remind you that any type of assets, is evaluated from multiple points of view and is highly risky and therefore, any investment decision and the associated risk remains with you."

***

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3 Phases Of A Bear Market: The Difference Between 2001, 2008 And Now
 

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3 Phases Of A Bear Market: The Difference Between 2001, 2008 And Now

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Comments (48)
Eugène Ayena
Eugène Ayena Jul 21, 2022 7:06PM ET
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hago el prestamo +23302140483
Kevin Preston
Kevin Preston Jun 28, 2022 9:48AM ET
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Given volatility, selling credit spreads on liquid, weekly options for Friday expirations.
Samer Diab
Samer Diab Jun 17, 2022 12:44PM ET
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dollar cost averaging into the dips of qqq, voo,dia and loading up on covered call etfs with high dividend like qyld, xyld for monthly income
Bader Alshammari
Bader Alshammari Jun 17, 2022 10:57AM ET
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Moving funds to $BTC already. For stocks doing nothing .. just enjoying the ride.
Selim Misirlioglu
Selim Misirlioglu Jun 17, 2022 5:58AM ET
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Keep the stocks which have 10 year trajectory, and covering losses through day trading with SPX
Onur Kirazci
peximet Jun 17, 2022 3:39AM ET
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Thank you for this, very useful
Thông Vũ
Thông Vũ Jun 17, 2022 2:38AM ET
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I don’t have a “long term” plan; too old to see how long the long rcan get. I trade options and want to begin holding shares when things are cheaper. 50% off perhaps. And I don’t mind missing the bottom. Buying on the way up is more fun.
Lou Mon
Lou Mon Jun 17, 2022 1:33AM ET
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Sold Everything a couple weeks back on the bounce, now buying SPX puts day trading
Fer Jongen
Fer Jongen Jun 17, 2022 1:33AM ET
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I have all value stocks and 20% cash. I am doing nothing!
amt hun
amt hun Jun 16, 2022 5:48PM ET
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I fond the current stock prices very good for middle and long term entries. I keep buying the dips.
Kuek Seng
Kuek Seng Jun 16, 2022 1:27AM ET
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what is smart cash management?
 
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