Investment Strategies: From Wall Street to Main Street Hingham MA

Craig Hartnett of Hingham MA examines for individual investors whether the August 2015 decline in stock prices is a short-term correction or the beginning of a bear market, which would be defined by more than a 20% decline in the major stock indices.

A look at history provides insights into bear markets. Since 1955 there have been 10 bear markets in U.S. stocks. All 10 bear markets occurred after the Federal Reserve raised interest rates by at least 1.37%. These tightening cycles, where there are sequential increases in interest rates by the Federal Reserve, caused either a recession (80%) or an economic downturn (20%). Leading into the two bear markets that did not precede a recession, the Federal Reserve raised interest rates by a much more modest amount. Interestingly, these two bear markets where much shorter, averaging 5 months as compared to 16 months for the eight bear markets that did precede an official recession.

Using history as the guide, in order for the current decline in the stock market to be the beginning of a new bear market and not a correction, there would be a recession or meaningful economic downturn on the near-term horizon. The impending recession or significant economic downturn would need to occur before the Federal Reserve has raised interest rates at all or following a possible modest increase in September or December and happen while the upward sloping yield curve is positioned for continued economic growth ahead. The main point for investors to know is that has not happened in the last 60 years. Therefore, the relationship between interest rate tightening cycles, the economy and stock market that has existed for at least 60 years would need to be broken for this to be the beginning of a new bear market.

This is meant to provide an investment perspective and not a recommendation from Craig Hartnett to investors in Hingham MA and the South Shore community.