What’s a bear market and will it bite me?
You have probably heard a bit about ‘‘bear markets’’ this week. Wondering what that means? You are not alone. In the past week, the number of google searches for ‘‘what does a bear market mean’’ have shot up.
So what’s the deal? And what have bears got to do with anything?
What’s a bear market?
We talk about a sharemarket being in ‘‘bear’’ territory when it falls at least 20% from a recent peak.
It is more of a symbolic benchmark than anything – you probably would not be feeling much better if your portfolio was only down 19.5%.
The opposite of a bear market is a bull market, in which prices are rising or are expected to.
The Merriam-Webster dictionary says the term ‘‘bear market’’ comes from a proverb warning against ‘‘selling the bear’s skin before the bear has been caught’’. It came to stand for someone who was selling with the expectation that the price would fall and they could then buy again more cheaply.
So, we have seen the reports of the US heading into bear territory, what about NZ?
It depends on the time frame you apply. Murray Harris, who is head of KiwiSaver at Milford Asset Management, says, if you look at the year to date, we hit a bear market on Thursday. ‘‘I’d say, following last night on the US markets, we’ll be further into ‘bear market’ territory today.’’ By 11.30 yesterday, the NZX50 had fallen another 1.83%.
Why is it happening now?
Share prices are softening for a few reasons. Central banks around the world hiking interest rates to try to slow inflation is one. When interest rates are higher, both businesses and households spend less, which can lead to businesses earning less.
If investors see a harder environment ahead for the businesses they invest in, they are likely to want to pay a lower price for a share in those firms, and may switch out of high-growth areas into firms with more steady cashflows like utilities, or into other investments, like bonds.
What does it mean for investors?
If you are in KiwiSaver, a managed fund, or you are one of the growing number of people who have investments in shares, this has probably not been a particularly pleasant year.
I know my own Sharesies portfolio, which I have had since the platform started, had a return-sinceinception of about 20% at the end of last year but is now down to 0.63%.
I haven’t even bothered to check my KiwiSaver balance because I know it is not going to be pretty. But, to me, it does not matter. My intention is for those investments to be for the medium and long-term, respectively.
As Harris says, things are probably going to be bumpy for a while but it is not all bad news.
‘‘Even with this year’s sell-off, the market is only back to mid-2020 levels after a 10-year plus bull run.
‘‘Investors should not panic, stay the course, remain focused on the long term, money in shares should be long-term money and if worried about your KiwiSaver remember your contributions during a falling market are buying you more value, which you will benefit from when the market recovers – which it always does.’’
The last time we had a really significant market fall was in March 2020, when everyone was worried about what Covid would mean.
But within two months, it had bounced back.
Don’t sell out of your investments unless you really need the money – it just crystallises losses that would otherwise only be on paper and you miss out on the recovery.
This downturn may well last longer than 2020’s. But consider the baked beans analogy.
You go to the supermarket and buy the same can of baked beans week after week. One week the can might be cheaper. At the supermarket, a shopper’s instinct is to buy more and make the most of that cheaper price.
Why is that not the case with investment units, which you would normally plan to buy regularly, anyway?
Think of your KiwiSaver or investment portfolio as a giant stock of cheaper baked beans and you might be willing to start contributing a little more during the downturn – stockpiling more beans for when the price goes back up again.