208: 6 Lessons From a Bear Market

What’d we learn from the most recent bear market? In this episode, Josh and Austin unpack the complexities of bear markets, offering 6 lessons to better your investments and financial plan. From analyzing the dynamics of stock market declines to exploring the value creation of U.S. publicly traded businesses, they provide actionable insights for investors. The duo emphasizes the importance of understanding real risk tolerance and avoiding emotional responses and much more. Tune in for practical lessons on maintaining a long-term investment plan in the face of market volatility.

Main Talking Points

[1:26] – What is a Bear Market?
[2:37] – How Does the Recent Bear Market Compare to the Historical Average?
[4:59] – Stocks Don’t Fall for No Reason
[7:51] – U.S. Publicly Traded Businesses: Creating Value for Shareholders
[13:02] – Dad Joke of the Week
[15:17] – To Understand Your Real Risk-Tolerance
[19:13] – Avoid Emotional Responses to the Markets
[20:23] – Focus on Your Long-Term Investment Plan

 

Links & Resources

Full Transcript

Welcome to The Invested Dads Podcast, simplifying financial topics so that you can take action and make your financial situation better. Helping you to understand the current world of financial planning and investments, here are your hosts, Josh Robb and Austin Wilson.

Austin Wilson:

All right. Hey, hey. Welcome back to Invested Dads Podcast, a podcast where we take you on a journey to better your financial future. I’m Austin Wilson, Co-Portfolio Manager at Hixon Zuercher Capital Management.

Josh Robb:

I’m Josh Robb, Director of Wealth Management at Hixon Zuercher Capital Management. Austin, how can people help us with our podcast?

Austin Wilson:

We would love it if you’d subscribe. If you’re not subscribed, hit that plus, follow, whatever icon is on your podcast player and leave us a review on Apple Podcasts or Spotify so that other people can find us more easily. And always remember that you have the ability to talk to us through our website. You can click on contact us, you can even invest with us. You can see if we would be a good fit. That’s pretty cool. So check out that or email us at hello@theinvesteddads.com. We would love to hear from you.

Austin Wilson:

So today, Josh, we are going to be looking back at the dead bear, the most recent bear market that’s now over, but Josh first, we’re going to tee this up and we’ve gone golfing together. So you know my tee skills are not that great.

 

Josh Robb:

You consistently put the ball on the tee. Your tee skills are fine. Getting it off that tee-

Austin Wilson:

Getting it off the tee is a whole different-

Josh Robb:

We both struggle with that.

 

[1:26] – What is a Bear Market?

Austin Wilson:

So, Josh, as a reminder, what is a bear market?

Josh Robb:

Yes. So, a bear market is a timeframe that’s started when the market goes from a high and goes down 20%. When you hit that 20% mark, they say we are now in a bear market. So it’s not the falling part, it’s once you get 20% below a high, you’re now officially in a bear market.

Austin Wilson:

And typically, on a closing basis.

Josh Robb:

On a closing, that’s usually what they use because throughout the day you may have movement, but yeah, if you close at 20% below a high, you’re technically now in a bear market.

Austin Wilson:

Correct. So, this is where I run into a bit of contention with a lot of people, but many believe that the new bull market starts on the flip side of that. So, after you hit that low, a rally of 20%, however, we would really say that we don’t know you’re in a bull market again until you’ve hit that all time high. Which guess what? We got back to all-time highs on specifically the S&P 500, which is the most popular index, 505 really large US companies on January 19th, 2024.

Josh Robb:

From the high point all the way down and then all the way back up and got above that old high point.

 

[2:37] – How Does the Recent Bear Market Compare to the Historical Average?

Austin Wilson:

So, the question is, how does this bear market compare to the average historical bear market? Because bear markets aren’t fun. You have paper losses; your account values are typically down quite a bit. They’re not fun to look at. They’re not fun to live through. The optimism in the market’s generally not very good. It’s not a good feeling. So, let’s talk about this particular bear market that we just endured. This particular bear market lasted 24 months because the original market peak was January 3rd, 2022. January 3rd, 2022 was the original… was the first market high before things started selling off. This bear market lasted 24 months because we just got back to all-time highs January 19th, 2024. This is about seven months shy, seven months short of the post-World War II bear market average, which is around 31 months of a total peak to peak.

So, a little bit shorter than that, the peak to trough drop, so that would be the January 3rd S&P 500 peak down to the bottom as far as it went.

Josh Robb:

Trough meaning the lowest point.

Austin Wilson:

Yep. Which was October 12th, I believe, 2022. So, it was a nine and change month fall. That was 25%. So, 25% drop. That was also a little bit more mild than the average bear market since World War II, which is about 31% drop. Trust me though, I’m with you. It did not feel less than the average because it was a more drawn-out bear market than we’ve had in recent history anyway. If we recall, 2018 Christmas Eve timeframe, we had an almost bear market. It was down 19.8 on a closing basis.

Josh Robb:

And that was just over just that last month.

Austin Wilson:

And that was very quick. And in January, things rallied and picked back up where you left off. And then in COVID, we had the COVID bear market really fast sell off 33 I think percent, but things rallied, and you were at all-time highs again by summer. So, two very, very short bear periods. So, this two-year period felt even a lot longer than we had experienced in some time.

 

[4:59] – Stocks Don’t Fall for No Reason

Austin Wilson:

So as an investor, I didn’t like looking at shrinking balances. As a money manager, I didn’t like my company’s value going down. So, we’re right along, it did not feel good, but it was a little bit more mild than we have historically experienced. So today we’re going to be looking back at six thoughts reflecting at this bear market, and we’re going to be talking about some things to keep in our mind as far as perspective goes, but also just some overall thoughts, kind of where the bear market led us. So, number one, stocks don’t fall for no reason. So, stocks fell a lot, right? It was a big drop, 25% of value wiped out. But why?

Josh Robb:

Yes.

Austin Wilson:

Well, one of the reasons was inflation was the highest that we had seen in four decades. That’s a long time. This inflation was fueled by trillions in fiscal and monetary stimulus from both parties on the fiscal side of things.

Josh Robb:

For COVID.

Austin Wilson:

Coming out of COVID and going through all of that, a lot of direct stimulus going into the economy, money sent to people, supply shortages then were caused also, and inflation just got out of control.

So we recall the peak of inflation was nine plus percent, right?

Josh Robb:

That’s right.

Austin Wilson:

That’s a lot higher than we’ve seen in some time.

Josh Robb:

Yeah, the long-term average is three and a half.

Austin Wilson:

So quite a bit higher than that. So this was really driven by response to a global pandemic. So the Fed responded to really the inflation situation picking up, I would say, and most people would probably agree a bit later than they should have by-

Josh Robb:

They were a little delayed.

Austin Wilson:

They were a little delayed. They were thinking this might not stick, but the inflation got real.

Josh Robb:

They used a transitory for a little while.

Austin Wilson:

It was really transitory for a really long time to them.

Josh Robb:

Well, I guess they’re right because eventually transitioned away.

Austin Wilson:

So it was actually around the beginning of 2022, I think it was March of 2022, we started getting interest rate increases, one of the fastest tightening cycles.

So monetary tightening, trying to slow down the economy to try and slow down inflation, one of the fastest tightening cycles on record, which sent interest rates not just short-term with the Fed controls, but across the board higher than they had been for many years, which pressured valuations more even specifically on the growth side of the market. If we remember, 2022 was a terrible bad year for growth stocks. 2023 was much, much better, but that was the big impact there. And then you add to this some real big uncertainty around Russia invading Ukraine and further geopolitical concerns in China, you had a recipe for a sizable pullback. There was a lot of uncertainty there. So stocks did not sell off, did not fall for no reason. I mean, that’s always the case. There’s always a reason to sell.

Josh Robb:

Yes.

Austin Wilson:

There’s always uncertainty. And there were a lot of things stacking up in the uncertainty column, which we can look back now and say, “Oh, well that was overblown,” but at the time it didn’t feel overblown.

Josh Robb:

Right. Yeah. You could justify the movement of the market based on the outlying indicators of the economy and the global market.

 

[7:51] – U.S. Publicly Traded Businesses: Creating Value for Shareholders

Austin Wilson:

Correct.

Josh Robb:

Yep.

Austin Wilson:

So number two, businesses and specifically publicly traded US businesses, they do a dang good job of creating value for shareholders. And this is one thing we learned through this last bear market. Publicly traded companies are exceptionally well run today, especially if you look at them in aggregate. And America’s largest publicly traded companies are the largest publicly traded companies for a reason. They’re the best run. They really are. So, if you look at average, the top 20 companies in the United States have compounded their earnings. So, this is earnings per share growth at 13% a year for the last five years. That’s double-digit earnings growth.

Josh Robb:

Yes, that’s good growth.

Austin Wilson:

Including the COVID-19 pandemic, including 2022 inflation going crazy and all kinds of other things like that. Why and how can they do this? Well, they are masters at cutting costs when they have to. That’s one of the reasons a lot of publicly traded companies. They’ll have a big round of layoffs here and there. They save a lot of money, and it helps earnings. They’re also the master’s at increasing prices to outpace inflation. And when they’re doing both of these at the same time, they’re even in a challenging situation, they’re able to eke out solid earnings growth. And that is something that we surely saw over the last couple years. So, what we do know is that earnings drive stocks higher over the longer term, and they significantly propelled the market higher from the bear market lows because things got overdone to the downside. All that uncertainty was priced into way too much to the downside, and companies actually held up much better than were feared.

So yeah, businesses do a great job at creating value for shareholders.

Josh Robb:

Now, it’s important to point out while they’re adding shareholder value, that doesn’t necessarily mean the price is cooperating. So, they were adding shareholder value and the price was moving.

Austin Wilson:

Yeah. Even while prices are coming down.

Josh Robb:

Right. So, separate those two out just for all the listeners that shareholder value or earnings is how much the company’s profits divided by the number of shares. That’s the shareholder earnings, earnings per share. That doesn’t always equate to the price. The price could move up or down, but the shares earnings show you how much each shareholder attributes of that profit.

Austin Wilson:

So, what this actually meant is that in the bear market, as things were getting worse, the actual fundamental situation, the earnings side, the net income of these companies didn’t do that much bad news at all. It was pretty good, but the prices went way down. So what you actually ended up was a market that was on sale.

Josh Robb:

Yes. Higher earnings per share, lower price.

Austin Wilson:

It was a great deal. Looking back, it was a fantastic time to be really greedy about putting money to work. And of course there’s a million reasons not to like we just talked about, but we actually were presented with a pretty good opportunity. And that’s usually the case in bear markets. In bear markets, yes, sometimes there actually is an earnings decline as well, but the price is often overdone to the downside much more than that. So you actually get pretty good, attractive, long-term opportunities. Another thing that this bear market brought to light is just the strength of the capitalistic economic situation that we live here in the United States specifically. So stocks don’t go up every year. We understand that. Earnings don’t go up every year, although they go up a lot more than they don’t.

Capitalism, however, really is super important and strong when it comes to being able to overlook the negative things that we’re hearing about and reading about. So especially here in the US, the United States consumer contributes more than two thirds of our overall economic growth in terms of what we’re looking at when we look at GDP, right? The US consumer through all of this has remained in fantastic shape.

Josh Robb:

Yep. Spending away.

Austin Wilson:

Spending away while inflation is coming down, that’s been really, really strong and with really no signs of slowing down at this point. So capitalism is all about that free market supply and demand driving prices over time, and it’s been proven time and time again to be the best economic system ever created for creating great quality of life for humans. And that’s something that we saw continue on throughout this bear market. So while stocks were down, people were still spending money, capitalism was working, the economy was still growing pretty nicely, and it was a good situation overall.

And I think that it just goes to prove, because you look at places like China, not capitalist, right? They have certainly had their own issues driven by not being in this sort of economic situation that we are in as capitalists. So, capitalism wins once again.

Josh Robb:

I think that’s always important to remember is when it comes to especially our economy and businesses within our economy, they do adapt and change with the times what’s going on. So when you had high inflation, they adjusted to continue to grow and earn. When you had rising interest costs, they adjusted to continue to grow. That’s really what you’re investing your money in, is companies who will adapt and change for what’s going on.

Austin Wilson:

And I would argue that’s why you always have a case to hold stocks.

Josh Robb:

Yes.

Austin Wilson:

Like stocks for the long run throughout thick and thin bear markets and bull markets, because America’s corporations are fantastic.

 

[13:02] – Dad Joke of the Week 

Josh Robb:

Yep. So, let’s take a break. We’ll do a dad joke and then we’ll come back, and I got a couple financial planning thoughts that go along with this bear market.

Austin Wilson:

Oh yeah. All right. That’s what everyone’s here for.

Josh Robb:

What do you call a musical puppy?

Austin Wilson:

I don’t know Josh.

Josh Robb:

A subwoofer.

Austin Wilson:

A subwoofer. I was thinking of something wolf related and I couldn’t think of anything.

Josh Robb:

Subwoofer.

Austin Wilson:

It’s a chase. Our buddy Chase.

Josh Robb:

Yes.

Austin Wilson:

We love Chase. Chase has been on the show. He has a lovely golden retriever.

Josh Robb:

Little puppy. Yep.

Austin Wilson:

He sends me golden retriever videos because I expressed interest in Jenna saying she wants a golden retriever.

Josh Robb:

Oh boy.

Austin Wilson:

I don’t think we’re going to pull the trigger right now. Maybe someday, but…

Josh Robb:

Would you like to-

Austin Wilson:

That’s a subtle-

Josh Robb:

Test run… Would you like to test run a little Australian Shepherd, Mini Poodle mix?

Austin Wilson:

Okay, so you bring that up. But we had an Australian Shepherd, rest in peace Sophia. We got her when she was eight. She passed when she was, oh, I don’t even know.

Josh Robb:

Old.

Austin Wilson:

Really old. So anyway, those things are nuts at an old age.

We got her when she was eight and she was a nut like absolutely nuts. So I cannot even imagine a half Australian Shepherd as a puppy.

Josh Robb:

Yeah, it’s not super… I mean our other dog, Baxter, which is…

Austin Wilson:

The opposite of the spectrum.

Josh Robb:

Yes, is a Bernie’s Mountain dog poodle mix. But when he was a puppy, he had a lot of energy. And the difference though is as it got bigger to a hundred-pound dog, he was a hundred pounds before he was a year old. An energetic a hundred-pound puppy is a lot. Indiana Jones, our little dog is probably, I don’t know, 20 pounds. And that energy is to me is actually easier to handle because literally can pick that dog up. But a hundred-pound dog is just jumping around like crazy.

Austin Wilson:

I mean, if you recall, we tried to have Baxter pull us on the sled one time.

Josh Robb:

Yes.

Austin Wilson:

I don’t think we could do that.

Josh Robb:

My goal is to get him to do that.

Austin Wilson:

Indy can’t do that.

Josh Robb:

No, he would not. But if you ever want to borrow, he’s a fun dog. Super dog.

Austin Wilson:

Super smart dog. Chase offered the same thing from Kep. Everyone’s trying to pawn off their dogs, which actually we’re going to Great Wolf Lodge with my family here in, that’d be next week I think for a couple days. So we have to get a sitter for Samson, our dog. He is the most easy chill non-hyper dog in the world, so everyone’s begging to watch.

Josh Robb:

That’s right. The easy dogs are the fun ones.

 

[15:17] – To Understand Your Real Risk-Tolerance 

Austin Wilson:

Absolutely. All right, Josh, this is where-

Josh Robb:

All right. Back on track. Bear market.

Austin Wilson:

Back to the bear market. We’ve got three more things to really reflect on.

Josh Robb:

This is financial planning look back, couple of things. So the first one is understand and know your real risk tolerance. And that becomes apparent in bull markets when the market’s going up and everything’s good, most people think or assume they can handle risk usually more so than they really can because everything’s going great, “Oh yeah, I would be okay seeing the market drop 20%. That wouldn’t faze me at all.” And then all of a sudden when it happens, they’re reacting, panicking, being concerned.

And while again, no one likes to watch that happen, the key difference is not liking to see it and reacting and adjusting or making decisions out of that fear or emotion. And so understanding your real risk tolerance is very important. And so don’t get caught up in the chasing returns, the fear of missing out to say, “Oh man, I will take that risk. I don’t want to be stuck behind if my friend next door got a 30% return and I only got 20. Oh man, I’m going to be upset I missed that.” But historically, most people that I work with, they’re more concerned about that loss than they are missing a little bit of that gain, that downward movement, seeing your portfolio value go down is a lot harder to tolerate than missing out on a little bit of additional upside.

So just make sure you have the correct risk tolerance. Stocks are historically your best way to grow your money, but to get that long-term success, you got to stick through it. And so the one way to help do that is you add cash or bonds into the portfolio to reduce the full volatility of the stock market. And so just make sure that you’re being honest with yourself when you’re judging how aggressive you are in your investments.

Austin Wilson:

And I would say that that’s another big value of working with a financial advisor is they have tools to help evaluate your risk tolerance and help give you some sort of guidance on asset allocation from there, where going in blind by yourself, that might be a little daunting.

What do you know if you’re a 80/20, 70/30, 60/40, 50/50?

Josh Robb:

How much do I put where?

Austin Wilson:

I don’t know. So that’s a great question for your advisor. But yeah, good point.

Josh Robb:

Yep. And again, it comes back to also is just you can make adjustments in a bear market. We made trades, it’s great, it’s fine. We weren’t changing our strategy, we were just adapting to what was going on and taking new information. The same is true. Your risk tolerance should say how aggressive or how conservative should you be within that though is always open to how do I best optimize that? But man, you don’t really want to be 100% stocks while the market’s going up and then after it drops, you realize I don’t want to do that. And you make that big adjustment while the market’s down.

Austin Wilson:

Yeah, I think there’s a difference between your advisor making trades in a model during that whole thing going on because that is what they’re trained to do, to react, to capture opportunities and eliminate risk and all that stuff.

But you making the mental choice to make a big change at the wrong time is because your example was you’re 100% stocks when things are going up, great. Things start going down, you ride it all the way, you ride it down and you’re 100% stocks and then you switch to something else. Well, you’ve eliminated a lot of your opportunity for recovery.

Josh Robb:

If you take this last example, let’s say once you found out we’re in a bear market, 20% drop, you said, “Ooh, I don’t want to drop another 20%,” so you took half of your money out of the stock market into bonds or cash or whatever. Well, it only went another 5% down. You already took the whole 20, and another five. And then for the next year and a half or so you had October was low and then all the way through 2023 and then right into this 2024, you then had this recovery.

And if you’re out of the stock market, you did not participate.

 

[19:13] – Avoid Emotional Responses to the Markets

Austin Wilson:

Correct.

Josh Robb:

And so you’re right. It’s just… understand my overall tolerance and then choose the investments that help best meet that. So that’s the first one that I had. Second one is the best way to avoid an emotional response is to make things automatic.

Austin Wilson:

I love it.

Josh Robb:

And we’ve talked about this in other episodes. “Set it and forget it” is a great thing to do because you don’t want to put it on you to always remember to make your contributions. So automate everything, set up your contributions into your account. So if you have a Roth IRA or however you’re saving, 401k’s are great because usually you have it right out of your paycheck, all that stuff, make it automatic that way while the market’s going down, you’re adding money in, while the market’s going up, you’re adding money in.

It doesn’t matter. We’ve talked about dollar cost averaging, but the idea is it smooths out your results, gives you a better overall return than the average because you’re not making decision to win. You just put your money in and allow it to work.

Austin Wilson:

And you’re essentially value investing yourself. You’re buying more when things are cheap and less when things are expensive and you smooth out your return and you ultimately by continuing to buy things as the market goes down and then recovers, you buy things cheaper and your overall return is better. It’s good.

 

[20:23] – Focus on Your Long-Term Investment Plan 

Josh Robb:

All right. And the last one is keep your sights on the future long term. So, in other words, we know you get a bear market and bear market comes every six to seven years, give or take.

Austin Wilson:

It depends, yeah.

Josh Robb:

Or you at least have a drawdown of a significant amount every six to seven years on average. And so if you know that’s coming, you got to look past that because you’re not saving for the next six or seven years. Most people have some portion of their investments for the long term, right? You’re looking for protecting yourself to your later stages of your life. And so the point being is if this money is not going to be used in the next handful of years, it really doesn’t matter what the market does because I just need to put it in the best thing for it and then let it go. And so keep your eyes on the long-term market volatility, which is that movement is not the most pressing danger that you have. The biggest danger for most people is losing your purchasing power, which is just another word for inflation. You lose the ability to buy the same amount of goods as you can today if your money cannot keep up with the rising costs or inflation.

And so bear markets normal part of the overall economic cycle. Those things happen. And we’ve talked about how they’re great for investors. In fact, savers awesome time, put money in, everything’s on sale.

Austin Wilson:

Especially the young ones, young people.

Josh Robb:

But along the way, don’t let that lose sight of actually what you’re really fighting against. It’s not market movements. You’re fighting against, can my dollar still buy the same thing in the future that it can today, and I need to grow that dollar to keep up with it. So that’s through your real danger. So understanding the different danger that you’re actually facing makes those drawdowns a little easier to say, especially for the young people to say, “Hey, you know what? I’m 30. I’m putting this money in my 401k. I’m not touching it. I can’t touch it till 59 and a half.”

Austin Wilson:

It doesn’t matter.

Josh Robb:

“Who cares? I’m just going to keep adding the money. The market historically has always recovered. I’m going to just continue to count on investing in good companies like Austin talked about that innovate and grow and adapt. They’re going to figure a way out and I’m going to trust in that.” And over the long run, historically, it’s always recovered and always gone to new highs.

Austin Wilson:

Absolutely. And we’re sitting at all time highs as we speak, which is a nice feeling to be. I mean, the market spends a good amount of time around all time highs, right? So this might ask the question, Josh…

Josh Robb:

Yes.

Austin Wilson:

If the market’s at all time high, should I even invest? Or am I going to get less good returns?

Josh Robb:

Yes. Should I wait for it to drop and put money in?

Austin Wilson:

Right. And the answer might surprise you, but it is actually, first of all, just keep sticking to the automatic investing is a great answer. But the truth is that putting money to work at all time highs actually yields better results historically speaking over one, three… one, two, and three year periods than just on average day. Because when the markets are strong, they typically remain strong for-

Josh Robb:

It’s that momentum, right?

Austin Wilson:

Yep. It’s momentum. So yeah, stick to the plan. Do it that way. Thank you for that, Josh. It wasn’t fun, but we made it through another bear market and hopefully we won’t have one for a while, right?

Josh Robb:

That’s right.

Austin Wilson:

All right. Well thanks for being here. Thanks for listening. You have someone asking about this bear market? Share this episode with them and we will talk to you next episode.

Josh Robb:

All right, talk to you later.

Austin Wilson:

Have a good one. Bye.

Thank you for listening to The Invested Dads Podcast. This episode has ended, but your journey towards a better financial future doesn’t have to. Head over to theinvesteddads.com to access all the links and resources mentioned in today’s show. If you enjoyed this episode and we had a positive impact on your life, leave us a review, click subscribe, and don’t miss the next episode.

Josh Robb and Austin Wilson work for Hixon Zuercher Capital Management. All opinions expressed by Josh Austin, or any podcast guest are solely their own opinions and do not reflect the opinions of Hixon Zuercher Capital Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Hixon Zuercher Capital Management may maintain positions in the securities discussed in this podcast. There is no guarantee that the statements, opinions, or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principle. There is no assurance that any investment plan or strategy will be successful.