- By SeedInvest
- July 15, 2022
- 10 minute read
This year has seen a confluence of events leading to steep declines in global markets and trillions of dollars in value going up in smoke. Both the Nasdaq and S&P 500 have slid into a bear market, and U.S. stocks are off to their worst annual start since World War II.1
Downward pressure on the U.S. economy has been helped along by Russia’s war in Ukraine, surging gas and consumer goods prices, and the Federal Reserve aggressively raising key interest rates in an attempt to stem the highest inflation levels in 40 years.2
Ahead, we’ll take a closer look at what’s going on in the market during these trying times, and weigh some short- and long-term expectations. We’ll also examine some historical information we have found that individual investors can employ to react better to market downturns like we’re seeing right now.
Recession Fears Loom, but We’re Not There Yet
Some market observers have begun to raise concerns the economy is in danger of slipping into recession.3 This is defined as a significant decline in economic activity over a prolonged period of time, typically two quarters or more. Although markets have dropped sharply this year, there are still hopes the current downward trend is part of a normal correction cycle and that we won’t see a full-blown recession.
One economic indicator being closely watched as a window into overall economic health is the yield offered on U.S. treasury bonds. Treasury bonds are debt obligations backed by the full faith and credit of the U.S. Government, which issues them to raise money to fund operations and cover debts. Investors receive periodic interest payments in proportion to the bond’s maturity period, which in the case of Treasury bonds range from 10 to 30 years. The further out a bond’s maturity, the more interest, or yield, is paid to the holder. This is what’s known as the yield curve.
In June 2022, the yield curve inverted, meaning shorter-term bonds started paying higher yields than longer-term ones. Since 1900, this “10-and-2” yield curve has inverted just 28 times, and 22 of those times came before a recession.4 While this in no way guarantees a recession in the near-term future, it’s historically seen as a potential canary in the economic coal mine.
What Has Happened to Stocks During a Recession?
U.S. stock market indices have experienced steep drop-offs this year as bear market and global instability concerns weigh on investors. As of late June, the Dow Jones Industrial Average is down over 14% so far this year.5 The S&P 500 is down more than 19.5%, and the teach-heavy Nasdaq has fared worst of all, down more than 27% YTD.6
Times of high inflation and global uncertainty have historically not been good for the stock market, as investors tend to become less risk-averse and seek to park their money in less volatile assets than stocks during periods of market upheaval. This tendency has accelerated the snowballing market sell-off we’ve been seeing this year, with the Nasdaq and S&P officially in a bear market as of June.7
The official definition of a bear market is when a broad market index declines by 20% or more over a period of at least 2-months, coupled with widespread pessimistic market sentiment. Historically, bear market cycles last around a year, while bull markets tend to last just short of four years.8 Following the 2008 economic crisis, U.S. markets experienced the longest bull market in history, lasting almost exactly 11 years until the onset of the COVID-19 pandemic in March 2020.9
Markets tend to be resilient, however, and history has shown that the darkest days of a bear market are often followed by a bull run, which is illustrated by three bear markets we’ve experienced since 2000.10
Between 2000-2002, a bear market saw the S&P 500 drop by 49.1%,11 bottoming out in October 2002.12 The index then gained 15% in the following month13, and more than 34% over 2003.14
The S&P 500 dropped more than 57% during a 1.4-year bear market kicking off in 2007 at the start of the financial crisis.15 The index would go on to nearly double over the next 4 years.16
The shortest bear market in history happened in 2020 when the S&P 500 index fell 33% in February near the start of the COVID-19 pandemic.17 The index quickly recovered, rising 63% from its 2020 bottom and notching a 26% return in 2021.18
Can Investors Time the Market Accurately?
An old investing adage about the futility of predicting market tops or bottoms says it’s not about timing the market, it’s about time in the market. The best traders in the world might have an informational edge that slightly increases their ratio of winning picks, but attempting to consistently time the market with any real accuracy is impossible.19
Buying low and selling high is perhaps the most fundamental piece of investing advice there is, but it can be risky to attempt to “catch a falling knife”, that is, buy into a plummeting market. Depending on a host of unknowable factors, investors in that situation could wind up lucky and catch a bargain if the price quickly rebounds. However, the “knife” could also fall even further, taking their capital along with it.
Between 1957 and 2021, the S&P 500 index has returned an average of 10.5% per year,20 which historically has meant in some years the index will return significantly more than average, and in other years investors’ portfolios will experience heavy losses. The unpredictability of public markets quarter to quarter, much less year to year, makes correctly timing when to put money into the market or take it out little more than a guessing game.
Historic Investment Strategies During a Recession
In times of economic decline, investors seek opportunities to shelter funds against the ups and downs of the markets. Depending on the nature of the downturn, some asset classes fare considerably better than others, thanks to a low correlation to external factors impacting the overall economy. Some of the most popular assets that typically shield investors from the worst of an economic downturn include Treasuries, municipal bonds, and money market funds.
These investments are considered highly stable compared to private equity investments, which are high in liquidity risks and include the potential of an investor losing their entire stake. However, the rewards are also potentially much greater looking at recent patterns, which show private equity returns historically outperform public markets following periods of recession.
Publicly traded companies tend to slow investment activity during economic downturns, but privately held companies are lighter on their feet, and are better able to deploy capital when prices are low to make strategic acquisitions in service of their growth ambitions.21 22
Private equity has only been widely available to retail investors for a little more than a decade. A diversified portfolio including private equity can help pare losses in down markets while offering the potential for market-beating upside during boom times.
Of course, private equity investments carry significant risk, including loss of capital. Private equity investments are also highly illiquid, which means funds invested can be tied up for years until a profit-generating liquidity event. If you’re investing in startups, only do so with money you can afford to lose.
SeedInvest and Private Equity Opportunities
Economic downturns have a tendency to naturally separate the good investments from the bad ones. Companies with shaky fundamentals faced with the sudden headwinds of a recession will typically experience more challenges than those on more solid footing. When the tides eventually turn, and historically they have every single time so far, the companies that make it through the worst of the storm will have proven their mettle in the ultimate stress test for a budding venture.
One of SeedInvest’s biggest value propositions is its commitment to offering only the highest quality private equity investment opportunities to its investor community of over 620,000. Less than 1% of the companies that apply to raise on the platform are approved; this extreme selectivity ensures we’re only listing businesses that our seasoned experts believe are positioned for growth and success.
To get started in your private equity investing journey, browse SeedInvest’s exclusive startup opportunities today.
- This presentation should not be viewed as a current or past recommendation or a solicitation of an offer to buy or sell any securities or to adopt any investment strategy. Past performance is no guarantee of future results, and there can be no assurance that an investment strategy will be successful or that the historical performance of an investment, portfolio or asset class will have a direct correlation with its future performance.
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- Past performance is no guarantee of future results. In addition, SeedInvest's due diligence process is no guarantee of success or future results. All investors should carefully review each investment opportunity and cancel their subscription within the allotted time-frame if they do not feel comfortable making any specific investment based on their own DD. Learn more about due diligence on the SeedInvest Blog and our vetting process in our FAQs.
- All securities-related activity is conducted by SI Securities, LLC dba SeedInvest, an affiliate of Circle Internet Financial, and a registered broker-dealer, and member FINRA/SIPC.