History can be a great teacher. That's certainly true when it comes to stock market history!

SMI's executive editor Mark Biller talked about that with host Rob West on Tuesday's MoneyWise Live. Mark also answered questions from callers. 

Audio is posted below. Scroll down for a transcript.

MoneyWise Live airs weekday afternoons on Moody Radio. A different version airs weekday mornings on American Family Radio.

For more radio appearances by members of the SMI team, visit our Resources page.


Transcript

Rob West:
This is MoneyWise Live — biblical wisdom for your financial decisions. (theme music ends)

Well, it's always comforting to have Mark Biller back on the program. He's executive editor at Sound Mind Investing, and I'll say a voice of reason when things look gloomy on wall street. Mark, great to have you with us today.

Mark Biller:
Thanks, Rob. Good to be back with you.

Rob West:
At least today's not gloomy, right? The market recovering after last week's big sell-off. We always like to see that. But a lot of folks, Mark, as you know, are nervous that the bears are about to be unleashed on Wall Street. Or I guess you could say we are officially there — as of last week, I think.

There's an article in the latest SMI newsletter that I think everyone should read. It's entitled, Lessons from Past Bear Markets — Are You Prepared? Why don't we begin today with why investors, in your mind, are so concerned?

Mark Biller:
Sure, Rob. Well, y'know, there's no shortage of bearish headlines out there right now, you know, inflation is especially noticeable now at the gas pump and grocery store. It's really digging into people's wallets and adjusting for inflation incomes have been falling now for a while, which means that the raises people have gotten over the last couple of years aren't keeping up with these rising costs. So there's some really tangible economic problems that people are feeling every day. And, of course, the nature of the news is to amplify those negatives constantly.

But I also think, Rob, that there's an element of this, that investors just are not used to these prolonged stock market downturns anymore. The last couple of selloffs that we've had in 2018 and 2020, they were about as deep as this current selloff that we're in right now, but they happened a lot faster and they ended a lot sooner. So in 2018, it was just three months, and 2020, it was one month. And then we were back to the upswing again. So with us being in the sixth month now of this new bear market, investors just haven't had to deal with a prolonged downturn in the last dozen years and it does take an emotional toll on people.

Rob West:
It really does. And of course, you mentioned inflation. That's certainly a big driver of the economic mood because it hits both investors and non-investors who still have to eat and drive to work.

So is that really the main issue for investors? Or is there something even deeper perhaps, Mark, to understand what's really going on here?

Mark Biller:
Yeah, I think that's a great way to ask the question, Rob, because there is something deeper, you know, on the surface, some of these very real issues, like the possibility of an economic slowdown or a possible recession down the road, these are kind of normal cyclical issues that investors have to wrestle through every so often.

But bigger picture, I do think that we're at the end of a couple of longer-term cycles right now. So these are obviously much more rare and unusual. One of those is this 30-plus year trend in globalization, which appears to be shifting away from constant greater global integration and moving now in the other direction. Now, you know, that's not all bad. There are gonna be some positives that likely come out of that eventually. But in the short term, that's very inflationary. It costs more to make things here than the way we've been doing it in recent decades. So inflation is probably gonna be a lot stickier, more persistent — and we've gotten used to decades, really, of falling inflation.

And the second big issue is that the Federal Reserve now has to deal with that inflation. It's the first time in decades they've had to do that and not be single-mindedly focused on growth.

Rob West:
Do you believe, as they seem to describe, they really do have the tools in their tool belt to reverse this as quick as everybody wants to? Or is this gonna be with us for a while — and is it really outside of even their abilities in some respects?

Mark Biller:
Unfortunately, I don't think that they've got good tools to deal with this. Really, the only tools that the Fed has deal with the demand side of the equation. So they can raise interest rates, they can do things along those lines that make it harder for you and I to buy things, and that reduces the demand for goods and services in the economy.

But as we've all come to realize over the last year or so, that's not the whole picture when it comes to the inflation problem that we have. We also have some supply issues going on, specifically in food and energy — those are two of the biggies. And the Fed, unfortunately, has no tools that can help increase the supply of those goods. And so anytime you're talking in economics, it's always where supply meets demand and that's how you determine prices in a market economy like we have.

So the Fed only has tools that can deal with one side of the equation. And that's, you know, it's not their fault. That's just that those are the tools that they have. But, unfortunately, what that means is it's a pretty blunt instrument.

And I think that what investors have been very slow to realize in this bear market so far this year is that when the Fed is telling them point-blank, "We are going to deal with inflation," the translation of that is kind of ugly for investors because really what the Fed means is, "We are going to batter the economy until demand falls enough that prices fall with that lower demand." Well, that's kind of a sobering thing when you think about what the Fed is actually saying. They're basically saying we're gonna make it a lot harder for you to buy stuff. Ouch. You know, that's not a very pleasant prospect.

So it is, it's a very, it's a complicated thing. It's why inflation has been kind of the Fed's boogeyman for decades — you know, going back to the early 80s — because they know better than most of us that they aren't particularly well-equipped to bring inflation down once it gets out of the starting blocks. And that's why they used to be so overzealous, it seemed like at times, to keep it from ever getting a foothold.

And then, of course, we've kind of changed that in recent years to where the Fed was actually courting higher inflation and saying we want more inflation. Well, unfortunately now we're in a case of, you know, realizing the old be careful what you wish for, because now we've got it and it's hard to drive it away.

Rob West:
Well, and you would think on the supply side, just the modernizations and technology would give us all the tools we need to make sure we're more efficient at logistics, moving goods and services, producing more food and energy. Unfortunately, policy issues come into play there, geopolitical issues and wars come into play. So as you said, it is a complicated factor, isn't it?

Mark Biller:
Yeah, it absolutely is. And you know, we've been writing about some of the energy and commodity side of things now for really a year and a half. And some of those decisions are pretty frustrating to see. But, you know, the bottom line on that is that even if different decisions start being made with things like drilling new oil wells and things along those lines, there's some lead time involved. You can't just flip a switch and have it tomorrow.

Rob West:
Yeah. Well, it was certainly something we'll keep an eye on.

All right, Mark, your team has been studying past bear markets. We obviously have "technically" just entered one — 20%-plus down from a recent high. So what should we know if we're gonna draw from the past?

Mark Biller:
Well, one of the things in this article that we really were trying to get across is that if investors can be patient, and if they're well diversified, then we wanted to remind them that the long-term trajectory of the markets is still higher. Even though we've got these problems today, you don't wanna lose sight of the big picture.

And one of the ways that we did that in this article was we put in a 50-year chart that's a little different than the types you've probably seen before of the S&P 500 stock index. All we did in this chart was we showed the last seven times that prices have declined by 20% or more including this year's selloff. And, and we kind of smoothed out these bigger moves over time. So when you do that and you zoom out over a longer time period, the interesting thing is you really can barely even see this year's downturn. What you see instead is the series of upward bouncing curves going higher over time. And hopefully, that's a little bit encouraging — at least for those who've got a reasonable time horizon to continue investing.

Rob West:
Yeah, absolutely. So the long-term prospects are still bright for the patient and diversified investor. That's a big idea.

Mark, the article also talked about what we might expect if this does turn into a prolonged bear market, and how we should prepare for it. So tell us about that.

Mark Biller:
Yeah. So, you know, unfortunately if the length of this bear market matches the average of the last six bear markets, then we really wouldn't expect this to end until sometime middle of next year. Now that may seem like terrible news, but really that's kind of where the article pivots because we think there are some things that investors can do to prepare for whatever downside is ahead. And the rest of the article really is focused on how to take advantage of any further declines.

Rob West:
Yeah, we'll talk about that. So, Mark, just so we understand, when you take out the — like what we experienced at the beginning of the pandemic, some of these really rapid declines with followed by rapid recoveries — how long is the average bear market, and what kind of downside are you typically seeing?

Mark Biller:
Yeah. When you throw out — of those six that I was talking about the last six bear markets — if you throw out 1987, which was just three months and then 2020, which was one month, the other four averaged 22 months. And there is another distinction that comes into play, and that is bear markets that don't have a recession in the economy tend to be quite a bit more mild than those that do. So that's the next thing that investors are really looking hard at is the prospect of a recession, because that would imply a little bit deeper bear market.

Rob West:
Yeah. Any idea what the average percentage would be with a recession on the downside?

Mark Biller:
Yeah. You'd be looking at 30% plus.

Rob West:
And we're already down 20%. So that would say that the end of this is closer than at least where we came from, right?

Mark Biller:
Potentially. Yeah.

Rob West:
<Laugh> Based on the averages. I get that for sure.

All right. Mark Biller will be back to tell us how we can take advantage of this bear market — there's a couple of ideas for you. Plus your questions: 800-525-7000.


Rob West:
Mark, just before the break we were saying, there actually is perhaps some ways to take advantage of a bear market. What specifically do you have for us?

Mark Biller:
Yeah, so there are really two ways that we were talking about in this article and the first is to be sure that you're prepared financially. If you haven't been investing with borrowed money, then you really can survive any bear market. You just have to maintain your strategy and wait it out.

For some investors though, bear markets are a little better than that. It's more of an opportunity than a threat. Lower stock prices are bad for people who have to sell right now, but they offer bargains for people who have money to buy. And what that means is, especially for younger investors, they can really potentially benefit from a bear market by adding to their holdings. And that could be just by continuing to buy each pay period through their 401(k) plan at work. Or, for example, in the case of our SMI members, we actually have been raising cash through the first part of this year, and hopefully, that will give our members a chance to buy again at lower prices when the time is right.

Rob West:
Yeah, that's exactly right. And I think that's the key. We wanna stay long-term. And if you're long-term in your focus, then why not be buying at a discount at much lower levels? I mean, PE ratios have gone from 21 to 15, I think, on the S&P 500. Why buy at the top all the time? And so this is a great opportunity, if we're gonna draw from history, to continue to buy into this market and look for — over time, not one month or one quarter, even one year, but several years down the road — look for the recovery that will boost your portfolio.

All right. We've got a number of questions for you, Mark. Let's try to move through them quickly.

We'll begin with Dewan in Aurora, Nebraska. Go right ahead.

Caller:
Yeah. Thanks for taking my call. I just wanted to bounce off my idea the way I think I should run my investment. I'm 68. I'll have to start pulling out of my 401(k) at 70. My wife and I are both drawing Social Security right now.

We also have about $30,000 in a bank that I'm thinking about watching the market, as it goes down, reinvest that in the market. And then when I have to start drawing out of my 401(k), taking the most of it that I don't need to live on, turning around and putting it back in a diversified account. [Does] that sound feasible?

Rob West:
Mark, your thoughts?

Mark Biller:
Yeah, I think so. I mean, it's gonna come down to balancing those expenses and the amount of income that you need. You know, one thing that we do a decent amount of with our clients at SMI Advisory Services, that if they're not needing all of the income that they're having to take out through these required minimum distributions [from their retirement accounts] — a lot of people aren't aware that they can actually do what are called Qualified Charitable Distributions. So a lot of MoneyWise listeners, I'm sure, are making charitable contributions — and there's actually a way to make those directly from those required minimum distributions from your 401(k) or IRA in a way that bypasses having to pay tax on that money.

So that can be a pretty nice way for folks, like yourself, Dewan, who may not need all of that income right now. If you're doing some charitable giving to begin with, that can be a way to actually lower your tax bill as well.

Rob West:
Yeah, I like that a lot. I think the big idea there is stay invested with long-term money and the QCD can be a great way to either do additional giving — or, Dewan, one way to think about what Mark's saying there is, perhaps money you would've given out of cash, replace that with money through the Qualified Charitable Distribution, and then you've got that cash to either put to work for you or just hang onto to increase your emergency fund. We appreciate your call today.

To Chattanooga. John, WMBW — go ahead.

Caller:
Yes, those 22 months average on those four bear markets that you mentioned — were the Democrats in power then?

Mark Biller:
<Laugh> Well you know, that's a good question, John. I have to think about that. Three of the four bear markets that we're talking about were 1973-74, then, of course, 2000 to 2002. And then we had another one in 2008 and 2009.

Now, with those three bear markets, each of those actually went down 45 to 55%. So I don't want to sugarcoat, y'know, what we could be looking at in terms of this bear market, because if we have another like those, then you could only be halfway through it at this point.

Now, as I go through those years — and the other one being '80 to '82 — it does seem like that's a mix of Democrats and Republicans. But I do think that, again, the idea of are we gonna have a recession that accompanies the bear market is a big deal because that's what tips us over into potentially looking at the nasty "grizzly bear type" instead of the more cuddly "Panda bear type."

Rob West:
<Laugh> Mark, always appreciate your insights rooted in scripture and based on a lot of data, we appreciate you stopping by.

Mark Biller:
Thanks, Rob! Good to be with you.

Rob West:
All right. Mark Biller, executive editor at Sound Mind Investing. Read Lessons from Past Bear Markets at soundmindinvesting.org.

We'll be right back. Stick around.