The Fed Is Set to Cut Interest Rates — the Time to Be Fearful When Others Are Greedy Has Arrived
2024-09-15 11:51:00
For the better part of the last two years, it’s been all systems go for bulls on Wall Street. Since the start of 2023, the iconic Dow Jones Industrial Average (DJINDICES: ^DJI), benchmark S&P 500 (SNPINDEX: ^GSPC), and growth stock-powered Nasdaq Composite (NASDAQINDEX: ^IXIC) are higher by 25%, 47%, and 69%, respectively, as of the closing bell on Sept. 13, 2024, and have all hit multiple record-closing highs this year.
While there’s little question that a resilient U.S. economy, along with investor euphoria surrounding artificial intelligence (AI) and stock splits, have driven equities higher, it’s important to understand that stocks can and do move in both directions.
According to investing great Warren Buffett, “Be fearful when others are greedy. Be greedy when others are fearful.” The time to be fearful has officially arrived for Wall Street and investors.
Be fearful when others are greedy, but maintain perspective
While nothing is guaranteed on Wall Street, the historic correlation between the stock market and rate-hiking/rate-easing cycles would appear to point to meaningful downside to come for equities. Tack on the fact that the stock market has been this pricey on only two other occasions since January 1871, and you have a strong case that a bear market awaits.
Although having a healthy cash position at the ready to take advantage of eventual price dislocations can be a smart move, it’s important to maintain perspective if you’re a long-term investor.
For example, as much as working Americans and investors might dislike recessions, they’re ultimately a normal and inevitable part of the economic cycle. More importantly, they’ve historically resolved quickly. Out of the 12 recessions since the end of World War II, only three lasted at least 12 months, and none surpassed 18 months.
Comparatively, most economic expansions have endured multiple years, with two periods of growth surpassing 10 years. There’s little doubt that optimists have spent far more time in the sun than under gray clouds over the last eight decades.
This same non-linearity to cycles is seen in the stock market.
In June 2023, when the S&P 500 was confirmed to be in a new bull market, the researchers at Bespoke Investment Group released the data set you see above on X, the social platform formerly known as Twitter. Bespoke calculated the calendar-day length of every bear and bull market in the S&P 500, dating back to the start of the Great Depression in September 1929.
Based on Bespoke’s analysis, the average bear market for the S&P 500 has lasted only 286 calendar days, or about 9.5 months, over a 94-year stretch. On the other hand, the typical S&P 500 bull market has endured for 1,011 calendar days, or 3.5 times as long.
You’ll also note that close to half (13 out of 27) of the S&P 500 bull markets have lasted longer than the lengthiest bear market, which stuck around for 630 calendar days, from Jan. 11, 1973, to Oct. 3, 1974.
Although history is quite clear that notable downside is expected for the Dow Jones, S&P 500, and Nasdaq Composite, it’s important to maintain perspective and take a wide-lens approach. Over time, optimism eventually wins out on Wall Street.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The Fed Is Set to Cut Interest Rates — the Time to Be Fearful When Others Are Greedy Has Arrived was originally published by The Motley Fool
