How Long Will the Bear Market Last as Fed Keeps Hiking Rates?

The S&P 500 jumped 8.1% in October, narrowing its year-to-date loss to 18%. The benchmark index has now gained or lost at least 8% in five of the last seven months.

 

Big swings in the stock market reflect the anxiety investors have felt as they digest surging bond yields, a slowing global economy, and a potential Fed “pivot” away from big rate hikes.

 

By some accounts, high inflation has ended the era of cheap money. The Fed in November raised rates for a fourth straight time by 0.75%, marking the briskest pace of tightening in decades.

Speaking at the Fed’s press conference on November 2 to discuss the latest hike, Chair Jay Powell said that future rate increases may come at a slower pace than the recent 0.75% raises. 

But he emphasized that persistently high inflation means rates will peak at an even higher level (perhaps above 5% versus 3.75% today) than the Fed expected after its September meeting.

 

No one knows how far or for how long rates will rise, but the market did not like the increased possibility of higher-for-longer rates; the S&P 500 fell 2.5% as Powell spoke. Aggressive tightening increases the risk of a more severe economic downturn and prolonged bear market.

 

Responding to the uncertain outlook, individual investors have increased the share of cash in their portfolios to around 25%, the highest level since March 2020, according to the Wall Street Journal.

 

This risk-off behavior does not come as a surprise since the present often feels worse than the past. That’s because we know prior troubles were fixed, but today’s issues remain unresolved.

 

However, this is no reason to make drastic changes to your investment strategy. Investors tempted to move to cash in anticipation of greater pain ahead may be surprised how quickly the market has historically bottomed before beginning its recovery to a new record high.

 

The S&P 500 has only had 12 bear markets (i.e., a 20%+ price decline from a record high) since 1950. The table below shows the S&P 500’s price decline from peak to trough (“Drawdown”) and how many months the market took to reach a bottom.

 

The average bear market registered a 34% drawdown that took place over 13 months.

The current bear market has lasted 9 months with a max drawdown of 25%. Six of the 11 other bear markets took longer to reach a bottom, with their peak-to-trough slumps lasting anywhere from 15 to 31 months. And three of them had max drawdowns closer to 50%.

 

Of these six longer-lasting bear markets, three of them were tied to jumps in inflation and interest rates from the late 1960s through the early 1980s.

 

If we followed the path of these more severe bear markets, perhaps the S&P 500 has another 20% to 40% to fall and will bottom in late 2023 or even 2024.

 

Or maybe this is the perfect pitch. The other five bear markets bottomed in less than a year with maximum drawdowns around today’s level, with two of those downturns driven by rising rates.

 

We won’t pretend to know where the market is headed or make any changes to our investment approach. But investors following a similar strategy to ours can take some comfort in knowing that quality dividend stocks have generally served as a safe harbor in this dynamic environment. 

 

Simply Safe Dividends' two income-focused portfolios and their comparable dividend ETFs have lost less than half as much as the S&P 500 this year. 

They have also outperformed the 15% slump in U.S. bonds, which have had their worst year on record, according to Bloomberg. And their passive income streams continue growing without interruption.

 

Companies capable of paying safe, growing dividends are often characterized by low debt levels, consistent free cash flow generation, and time-tested operations. These traits insulate many of these firms from the fundamental and valuation pressures caused by high inflation and rising rates.

 

Dividend increases continued to significantly outpace dividend reductions in October as well, aided by third-quarter corporate profits that have tracked in line with analyst expectations calling for low single-digit growth.

Next year’s outlook appears less certain. 2023 will be a pivotal year for the economy as the impact from rising rates builds.

We are monitoring the stocks in our Dividend Safety Score coverage universe with greater focus on their exposure to variable-rate debt and ability to mitigate stubborn inflation. We won’t get every call right, but we will continue doing our best to help our members keep their portfolios between the guardrails.

If you're looking for a service that can help you avoid dividend cuts and make tracking your dividend portfolio a breeze, you may be interested in learning more about Simply Safe Dividends.