Why Investors Should Stay Invested During Bear Markets

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The US equity market is in a bear market this year. The S&P 500 is down about 19% year-to-date. After a few months of relentless declines, stocks saw a brief run up during the summer. That brief bull run seems to have ended and equities are heading in the downward direction again. The Federal Reserve is projected to raise interest rates again sharply next week. It remains to be seen if they can tame soaring inflation and avoid the economy going into a recession.

With that said, though bear markets are horrible to go through it is wise to stay invested for the long-term. This is because bear markets tend to end inevitably at some point and stocks tend to go up in the long run. Since it is impossible to predict when markets would turn directions, it is not smart trying to time the market. The following chart shows the growth of $1 from 1926 thru the end of 2021:

Click to enlarge

Source: Morningstar, National Bureau of Economic Research, and BlackRock, as of 12/31/21. Past performance does not guarantee or indicate future results. It is not possible to invest in an index. U.S. stocks are represented by the S&P 500 Index  from 3/4/57 to 12/31/21 and the IA SBBI U.S. Lrg Stock TR USD Index from 1/1/26 to 3/4/57, unmanaged indexes that are generally considered representative of the U.S. stock market during each given time period. Index performance is for illustrative  purposes only. It is not possible to invest directly in an index. Assumes reinvestment of dividends and capital gains and that an investor stayed fully invested over the full period.

This chart illustrates the long-term performance of the S&P 500 Index going back to the 1920s. Even though the market, as measured by that index, has endured painful selloffs and down periods, such as the Great Depression or the 2008 Global Financial Crisis, over the long term the index has climbed. An investment of $1000 in 1926 would have grown to $14,088,112 by the end of 2021.

Source: Why should investors stay invested during market volatility?, Daniel Prince, iShares

Another important point to note from the above chart is that not many investors are going to hold stocks such a long time. However even during other shorter periods stocks have gone up more than down. For instance, the market has gone through many negative events in recent years including the SARS Outbreak, the bursting of the Tech Bubble, Global Financial Crisis(GFC), etc. Despite all this the S&P 500 is much higher today than before these events.

Related ETF:

  • SPDR S&P 500 ETF Trust (SPY)

Disclosure: No positions

Cumulative Central Bank Balance Sheets: Chart

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The balance sheets of major global central banks have ballooned in the past few years as they continue to borrow to keep the economy growing. One of the reasons for the soaring inflation can be attributed to this relentless money printing. The following is a brief excerpt from an interesting piece I came across recently:

So what has caused the big recent spike in inflation?

As much as President Biden would love to call this “Putin’s price hike” and Labour want to call this the “Tory cost of living crisis” the origins are much bigger. How big? How does $24 Trillion bigger sound? Is that big enough?

This chart below is now a little old but the total numbers haven’t really come down yet. The chart below is effectively money printing. To describe this in a very simplified manner the central banks print money and use that to buy government bonds and other assets that it then puts on its balance sheet. The theory is it swaps cash for bonds and subsequently releases the cash into the financial system to be loaned out, paid out as benefits etc, ending up in the consumer or business’s pockets.

Since Alan Greenspan started this economic experiment in 1999 global central banks have convinced themselves that more is better when it comes fixing global economic problems with more cash. And each new problem that has arisen, they have arrived faster and with more stimulus than the previous time. Why? The same reason Roman Abramovich kept changing Chelsea managers. Because it’s worked every time. Until it doesn’t.

Let’s look back at some examples over the past 20 years. In 2008 the global financial system nearly came to a grinding halt and was only saved by the liquidity injection we can see above. Between 2010 and 2015 a number of European countries defaulted (or almost defaulted) on their debt and were only saved because the European Central Bank “did whatever it takes” to save them. Then the Covid crash of March 2020 saw the coordinated global shutdown of the world’s economies – again only saved by an enormous injection of cash into the system.

Time and time again we have hit major financial problems and time and time again printing more money has saved the system with very little consequence – until now.

The consequences of printing more money go back hundreds, almost thousands of years. From Roman emperors shaving the sides off their silver coins to Henry VIII debasing the amount of gold and silver for cheaper metals to the German government of the Weimer Republic printing almost unlimited banknotes, Governments and Kings have found the allure of “free money” too easy resist – and each time has not exactly ended well.

Source: Inflation: The how, why and what next, Permanent Wealth Partners

Update (1/2/23):

1.Central Banks Balance Sheets 2005 to 2021:

Source: Big Balance Sheets Can Mean Big Risks, The Conference Board

2.Central Banks Balance Sheets 2008 to 2021:

Source: Central banks start turning off the cash taps, Reuters

3.Balance Sheet of Central Banks 2006 to 2020:

Source: Bank of France

4.The Chainalysis 2021 Global Crypto Adoption Index:

Source: Why I’m Less Than Infinitely Hostile To Cryptocurrency by Scott Alexander

The Worlds Biggest Uranium Producers: Chart

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The top five countries that have the largest uranium resources in 2019 are Australia, Kazakhstan, Canada, Russia and Namibia according to The World Nuclear Association. Russia is estimated to have about 5 percent of the world’s supply.

The following chart shows the world’s top uranium producers in 2021:

Click to enlarge

Source: Russia’s Stranglehold On The World’s Nuclear Power Cycle, Kristyna Foltynova, RFE/RL