Oct
01
2024
What Is a Golden Cross Pattern in Stocks? How Do They Form?

What Is a Golden Cross Pattern in Stocks? How Do They Form?

By | Growing Wealth, invest, Investing | Comments Off on What Is a Golden Cross Pattern in Stocks? How Do They Form?

Editor's Note: Options are not suitable for all investors. Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Please see the Characteristics and Risks of Standardized Options.

The golden cross pattern is a technical indicator that appears when a security’s short-term moving average rises above its long-term moving average. A golden cross is generally interpreted as the sign of an upcoming market rally.

The golden cross pattern is a momentum indicator, and it tends to be popular because it is easy for chart watchers to spot and interpret. It doesn’t occur as often as other chart patterns, but when it does it sometimes even makes news headlines because it is a strong bullish indicator for a stock or an index.

How Do Golden Cross Patterns Form?

The golden cross candlestick chart pattern happens when the short-term moving average (e.g. the 50-day moving average) moves above and crosses a long-term moving average such as the 200-day moving average, or DMA.

It is an indicator that the market will probably head in a bullish direction, and can be used by stock investors, day traders, swing traders, options traders, or anyone interested in analyzing price movements.

A moving average is a graph of the average value of a stock price for some trailing period of time. Commonly used moving averages are the 50-day moving average (DMA) as a short-term measure and the 200 DMA as a long-term measure.

That said, traders can use moving averages of various lengths, from hours to months, to capture a desired time frame.

Recommmended: Important Candlestick Patterns to Know

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3 Stages of a Golden Cross

There are three stages that form the Golden Cross pattern:

1.    Downtrend. The first stage of the golden cross happens before the moving average lines cross. A downtrend occurs, and the short-term average is lower than the long-term average, but then buyer volume starts exceeding seller volume.

2.    Breakout. Next, the cross happens. The short-term moving average crosses over and above the long-term moving average, reflecting a reversal of the downward trend and upward momentum.

3.    Upward momentum. The trend continues and the prices continue to rise, with both the short- and long-term DMAs creating support levels (the lower end of both average prices) and indicating movement toward a bullish market.

Understanding support and resistance levels is key to reading technical charts. Support indicates where the price tends to stop falling; resistance indicates where the price tends to stop rising.

What Does a Golden Cross Tell Traders?

When the short-term average is higher than the long-term average, this means that short-term prices are rising compared to previous prices, showing bullish momentum.

The candlestick pattern that’s opposite the golden cross is the Death Cross chart pattern, which is when the short-term average moves below the long-term average, indicating a bearish market trend.

You can think of the golden cross pattern as a logical example of how price momentum can work. Because it’s the short-term DMA that rises and crosses the long-term DMA in a stock chart, it makes sense that analysts would interpret this as a bullish indicator that could have some staying power, as the short-term DMA would eventually play into the long-term DMA.

How Does a Golden Cross Work?

A golden cross occurs in a technical chart when the short-term moving average dips down to its resistance level, and then moves upward, crossing the long-term moving average.

Traders can use different time periods when conducting technical analysis, but the use of the 50-day moving average and the 200-day moving average are common when it comes to identifying the golden cross pattern. The longer the time period, the more lasting the upward trend may be.

Different traders, for example day traders or options traders, can use shorter periods, depending on when they’re aiming to place trades and what their strategy is.

Pros and Cons of Using the Golden Cross

The golden cross can be a useful technical pattern for traders to use to spot changes in market trends. However, on its own it has some limitations.

Benefits of the Golden Cross

The golden cross is known as one of the strongest bullish technical indicators, and can reflect other positive underlying factors in a particular stock.

Furthermore, since the pattern is so widely known, it can attract buyers, thereby helping to fulfill its own prediction.

Drawbacks of the Golden Cross

Like any chart pattern, there is no guarantee that prices will rise following the golden chart pattern.

Chiefly, the golden cross is a lagging indicator. It shows historical prices, which are not necessarily an indicator of future price trends.

Even if prices do rise, they might not rise for long after the golden cross forms.

Due to these uncertainties, it is best to use the golden cross in conjunction with other indicators.

How to Trade a Golden Cross

Both long-term and short-term traders can use the golden cross to help them decide when to enter or exit trades. It can be used both for individual stocks and for trading market indexes.

Most traders use the golden cross and Death Cross along with other indicators and fundamental analysis, such as the relative strength index (RSI) and moving average convergence divergence (MACD).

RSI and MACD are popular indicators because they are leading indicators, potentially providing more real-time information than the golden cross pattern.

What Time Frame Is Best for a Golden Cross?

The most popular moving averages to use to spot the golden cross are the 50-DMA and the 200-DMA. However, day traders may also spot the golden cross using moving averages of just a few hours or even one hour.

Whatever the chosen time period, traders enter into the trade when the short-term average crosses over the long-term, and they exit when the price reverses again.

Because the golden cross is a lagging indicator, investors enter a trade when the stock price itself rises above the 200-DMA rather than waiting for the 50-DMA to cross over the 200-DMA. The logic being: If traders wait for the pattern to form they may have missed the best opportunity to enter into the market.

Short sellers may also use the golden cross to determine when the market is turning bullish, which is a good time for them to exit their short positions.

The Takeaway

Chart patterns are useful tools for both beginning investors and experienced traders to spot market trends and find entry and exit points for trades. The golden cross is one indicator that technical analysts might use to determine whether a stock or market is bullish.

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SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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Oct
01
2024

5 Common Recession Fears and How to Cope

By | Growing Wealth, invest, Investing, Life & Career | Comments Off on 5 Common Recession Fears and How to Cope

Millions of Americans are anxious about recessions and economic downturns, which often involve job-losses and tightening budgets. Not to mention, investment portfolios tend to take a hit, too. These worries are normal, and fortunately there are ways to cope in the short-term.

The first step to handling that anxiety is overcoming the fear itself. While it’s normal to be worried about a recession — how long it might last, how dire the consequences might be — the truth is that the economy is cyclical. It expands and contracts, and recessions are a natural part of the order.

5 Common Recession Fears

Some investors choose to stick to their strategies or mantras during a recession. Of course, you can always carry on with your online stock trading even during a recession, but whether you choose to do that is up to you. But it’s not always so simple for every investor.

That’s because when it comes to making financial decisions, emotions are rarely your friend – that includes fear, doubt, and anxiety. With that in mind, here are some of the most common recession-related fears people often grapple with during times of economic uncertainty.

1. What If This Recession Lasts for Many Years?

While it’s possible that a recession could last for a long time, it helps to have some historical context.

Since the end of World War II, there have been 12 recessionary periods — including the short, sharp decline in early 2020 sparked by the pandemic. While that one only lasted a couple of months, U.S. recessions have averaged about 11 months in duration.

There have been outliers: Notably, the Great Recession of 2008 lasted for 18 months; and the Great Depression of the 1930s lasted about four years, although the repercussions extended that financial crisis until 1938.

That said, bull markets tend to last longer than bear markets. Equally important to remember is that every financial crisis has also informed new monetary policy and new fiscal tools that help protect consumers and investors.

2. What If Unemployment Soars?

It’s true that the potential for job loss is higher during a recession, when companies may be forced to lay off some of their workforce. While this is a common occurrence — as demand for goods lessens and output drops, companies typically need to cut expenses — there is a potential upside.

Unemployment numbers tend to lag a bit; joblessness typically rises to its highest level at certain points during the recession, and recovers to prior levels after the recession has ended. This means that some workers may have a window of opportunity to either look for new jobs now, or shore up their savings (in case of a layoff).

Be open and flexible to changes in responsibility. Lower your expectations around raises and bonuses. Try to bring value to the company, by going above and beyond, or by learning a new skill.

Make connections with your coworkers and network with people in your industry. It might be helpful to spruce up your resume too. That way, should you be laid off you can hit the ground running.

Take advantage of the shift to the gig economy, e.g. becoming your own boss, and relying on various income streams rather than a single full-time job. Not only are part-time positions becoming more common, it’s possible that your employer may be open to a gig arrangement, rather than completely letting go of a qualified employee.

A common rule of thumb is to keep three to six months’ worth of income in an emergency fund.

Recommended: Discover your ideal emergency fund amount with our emergency fund calculator.

3. What If You Lose Your Savings?

Emergency savings are important in any circumstances, as life is full of curveballs and unpredictable expenses. To that end, it’s smart to keep at least one month’s worth of expenses in a rainy day fund — three to six months is better, of course, but always have a cushion for life’s inevitable emergencies.

A recession can hit your savings hard. But it’s better to spend down your emergency fund than to panic and make financial moves you’ll later regret. At all costs, try to avoid the following:

•   Covering expenses with your credit card, and incurring debt that you have to pay off at high interest rates.

•   Taking out a home equity loan. While the interest rates may be lower on these loans, it’s still an additional monthly expense. And if your home value dips, you could put yourself in a precarious position when you need to sell.

•   Taking a loan from your 401(k). While borrowing from a 401(k) has its pros and cons, and a loan is usually better than taking an early withdrawal, there are still a number of risks. The biggest being: If you do get laid off, the entire loan could be due within a 12-month period.

In short: Build up your savings while you can, especially if you’re concerned about losing your job. And don’t be afraid to spend some or even all of that emergency money if things go south. That’s what the money is there for.

4. What If You Can’t Cover All Your Bills?

A recession can mean that money is tight, and that your bills may go up. If a job loss is looming, you may have real fears of being able to cover your expenses. Fortunately, one area where you have some control is how much money you spend.

The first step in lowering your expenses is to get to know them, especially the bills and subscriptions you pay automatically (or are on an auto-renewal system).

Take a look at your current spending habits by examining your bank statements (you can usually get a transaction history right on your phone). You don’t have to read through months of expenditures. What you spend in one month is probably similar to what you spend any other month (despite some seasonal differences).

As you examine what, where, and why you spend, note that some expenses are easier to control than others. Here are some common areas where it’s often possible to make cutbacks:

•   Food (eating out, snacks) and groceries are generally the biggest household expenses, after mortgage or rent — but they’re also easy to rein in.

•   Utilities (e.g. use less gas, oil, electricity).

•   Clothing and other “nice-to-haves” (limit spending to necessities).

•   Subscriptions (you’re likely paying for several streaming or music services you rarely use; it’s easy to forget what you signed up for a year ago).

•   Examine your insurances. Sometimes you can lower premiums by switching providers or calling and asking for a discount.

Once you trim your expenses, you may realize there are other ways you can cut back that aren’t on the above list — but not everyone has these options. You could change your commute to save money. You could take on a roommate who can split expenses.

5. What If Your Investments Lose Value?

It’s likely that your retirement account(s) and investment portfolio could lose value when the markets are down, or fluctuating. As discussed above, you don’t want to react strongly and pull your money out of the market impulsively. That’s when you lock in losses that can be hard to recover from.

If you have a financial advisor, or you’re thinking of working with one, you may want to discuss sooner rather than later how well-diversified your portfolio is. Diversification can help protect against volatility in some cases. But portfolio diversification is ideally something you do before a recession sets in.

A better approach during a recession is to stay the course. Continue to invest; continue to save for retirement. Rather than impulsively change your financial behavior, intentionally keep doing what you’ve always done. One way to do this is by using a robo advisor, which incorporates highly sophisticated technology that uses automation to help you stick to your own plan. You’ll likely find yourself in better shape when the recession ebbs and the markets rise once more.

The Takeaway

It’s natural to feel worried about the onset of a recession. Most people have fears about how long a recession could last and what the possible consequences could be in terms of their jobs, their bills, their long-term savings and even retirement.

That said, there are a number of ways to cope. While headlines may sound dire, the reality of a recession is that it may not last as long as you fear. Also, it can take some time for ordinary people to feel the impact. That can give you time to be proactive, including giving your job options (and spending habits) a careful review, beefing up your emergency savings, and reminding yourself to stay calm above all.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).


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INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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Oct
01
2024
Investing for Retirement: Guide to Emerging Markets

Guide to Investing in Emerging Markets

By | invest, Investing, Preparing for Retirement | Comments Off on Guide to Investing in Emerging Markets

Emerging market investments include owning shares in companies from countries like China, India, Brazil, and South Africa, among others. There are pros and cons to owning emerging market investments, but these stocks are a significant part of the global market.

Investing in emerging markets can help diversify your portfolio, which is one of the reasons that some investors do it. There are, however, risks associated with investing in emerging markets that investors should be aware of.

Understanding Emerging Markets

Investing in emerging markets, or even if you plan to open an IRA and use it to add foreign stocks to your portfolio, may prove to be a part of a successful investment strategy. If, that is, you understand what you’re investing in.

Emerging markets are economies that are in the middle between the developing and developed stages. Emerging markets risk can be high since these areas often see rapid growth and high volatility with booms and busts. Some of the most well-known and biggest countries that investors may look to invest in include China, India, Brazil, and South Korea.

Emerging market investments are generally seen as a higher-risk area of the global stock market. Volatility can spike during periods of political upheaval and when emerging market recessions strike.

As investors get older, risk must be managed through diversified investment plans. You might consider reducing emerging market exposure in your portfolio as your time horizon shortens and retirement nears.

Why Invest in Emerging Markets?

Emerging market investments have been popular for decades. It became easy to own a broad emerging market index fund within an investment portfolio in the early, when exchange-traded funds (ETFs) gained popularity.

The decade of the 2000s featured strong outperformance from the high-risk, high-reward profile of emerging market investments. But volatility in these markets has also been a factor.

People like to invest in areas of the stock market that exhibit rapid growth potential along with having the potential for diversification. High economic growth rates, such as those in China and India, often attract investors seeking to benefit from stocks of those nations. Indeed, there can be periods like the 2000s when strong bull markets take place.

Moreover, owning high-growth areas within a tax-advantaged account can be a savvy retirement savings strategy. This can be helpful when choosing a retirement plan.

Can You Build a Retirement Portfolio With Emerging Markets?

It’s possible to build a segment of a retirement portfolio by investing in emerging markets. Also consider that emerging market bonds are a growing piece of the global fixed-income market.

In addition, owning emerging market investments in retirement accounts is possible via ETFs and both active and passive mutual funds. Moreover, many 401(k) plans offer an emerging markets fund, too.

When thinking about investing in emerging markets, keep in mind that emerging market stocks comprise a fraction of the overall market. Emerging markets stocks represent 27% of the global stock market.

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Pros of Investing in Emerging Markets

There are many pros and cons of investing in emerging markets. When you start saving for retirement, it may be a good time to think about investing in emerging market stocks, since you’d likely have a relatively long time horizon to weather volatility.

Here are some of the pros of investing in emerging markets.

Opportunity to Generate Returns

Investing in emerging markets may present the opportunity to generate returns in your portfolio, although it does assume risks, too.

Also consider that more than 80% of the world’s population lives in emerging market countries, while just 27% of the global stock market is weighted to them. Investing for retirement could have at least some exposure to this area for risk-tolerant individuals.

Diversification Benefits

International investments can help offset the ebbs and flows of U.S. stocks through diversification. Consider that the domestic equity market is more than 60% of the global market. So if the U.S. goes into a bear market, foreign shares might outperform. Retirement investing should have a diversified approach.

Cons of Investing in Emerging Markets

Emerging markets can be volatile, and they expose investors to a host of risk factors. Political, economic, and currency risks can all hamper emerging market investments’ growth.

Due to the many risks, it’s common for retirement investors to tone down their stock allocation as they approach retirement. Here are some potential downsides to investing in emerging markets.

Potential Underperformance

Emerging market stocks have underperformed in recent years for a host of factors – such as the global pandemic, and military conflicts in Europe and the Middle East. So, it’s important to consider that these stocks could underperform domestic stocks in the future as well.

Correlations Might Be Changing

Some argue that emerging markets today have more correlation to other markets, so having exposure might simply expose someone to the risks and not the benefits.

High Volatility

Investors of all experience levels might want to steer away from the boom-and-bust nature of emerging markets. The process of evolving from an emerging market to a developed market is usually fraught with risk. In some areas, political turmoil might cascade into a full-blown economic recession.

Emerging market fixed-income investors can also suffer when high-risk currency values fall during such periods of volatility. Back in 1998, the “Asian Contagion” was an emerging markets-led debacle that caused a big decline in markets across the globe.

Uncertainty in China

China is now the biggest weighting in many emerging market indexes, up to one-third in some funds. That can be a lot in just one country, particularly in one as uncertain as China, given its one-party controlled economy.

Start Investing for Retirement With SoFi

Building a retirement portfolio often includes owning many areas of the global stock market. Emerging market investments can play a pivotal role to ensure your allocation has higher growth potential, but you must be mindful of the risks.

It’s possible to invest in emerging markets through a variety of means, including through a retirement account, such as an IRA. But keep the risks in mind, along with your overall investment goals and time horizon.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

Is it worth investing in emerging markets?

Strong growth potential and diversification benefits are reasons to own emerging markets for your retirement portfolio. That said, emerging markets are a small part of the global stock market. A diversified retirement portfolio should include this slice of the market, but investors also must recognize the risks. There are periods during which emerging market investments can underperform the U.S. stock market.

What is the best emerging market to invest in?

When figuring out emerging markets, you might be curious which one is the best. It is hard to say there is one in particular. Emerging market risk can be high, so to help mitigate that, owning the entire basket can help ensure the benefits of diversification.

Should my entire retirement portfolio be in emerging markets?

Building a retirement portfolio with emerging markets is common but putting all your eggs in the emerging market basket might not be the wisest move. Young investors can perhaps own a larger weight in this volatile equity area, but older investors should think about winding down their emerging markets stock exposure as they near retirement.

Photo credit: iStock/Kateywhat

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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Sep
28
2024
Bear Markets Explained

What Is a Bear Market? Characteristics and Causes, Explained

By | Growing Wealth, invest, Investing | Comments Off on What Is a Bear Market? Characteristics and Causes, Explained

A bear market is defined as a broad market decline of 20% or more from recent highs, which lasts for at least two months. Although bear markets make for dramatic headlines, the truth is that bull markets tend to last much longer — the average bear market typically ends within a year.

While most investors might know the difference between a bull and a bear market, it’s important to know some of the characteristics of bear markets in order to understand how different market conditions may impact your portfolio and your investment choices.

What Is a Bear Market?

Investors and market watchers generally define a bear market as a drop of 20% or more from market highs. So, when investors refer to a bear market, it usually means that multiple broad market indexes, such as the Standard & Poors 500 Index (S&P 500), Dow Jones Industrial Average (DJIA), and others, fell by 20% or more over at least two months.

Note, though, that 20% is a somewhat arbitrary barometer, but it’s a common enough standard throughout the financial world.

The term bear market can also be used to describe a specific security. For example, when a particular stock drops 20% in a short time, it can be said that the stock has entered a bear market. Bear markets are the opposite of bull markets, the latter of which is when the market is seeing a broad increase in asset values.

Bear markets are often associated with economic recessions, although this isn’t always the case. As economic activity slows, people lose jobs, consumer spending falls, and business earnings decline. As a result, many companies may see their share prices tumble or stagnate as investors pull back.


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Why Is It Called a Bear Market?

There are a variety of explanations for why “bear” and “bull” have come to describe specific market conditions. Some say a market slump is like a bear going into hibernation, versus a bull market that keeps charging upward.

The origins of the term bear market may also have come from the so-called bearskin market in the 18th century or earlier. There was a proverb that said it is unwise to sell a bear’s skin before one has caught the bear. Over time the term bearskin, and then bear, became used to describe the selling of assets.

Characteristics of a Bear Market

There are two different types of bear markets:

•   Regular bear market or cyclical bear market: The market declines and takes a few months to a year to recover.

•   Secular bear market: This type of bear market lasts longer and is driven more by long-term market trends than short-term consumer sentiment. A cyclical bear market can happen within a secular bear market.

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History of Bear Markets

The most recent U.S. bear market began in June 2022, largely sparked by rising interest rates and inflation. The bear market officially ended on June 8, 2023, lasting about 248 trading days, according to Dow Jones Market Data, and resulting in a market drop of around 25%.

Including the most recent bear market, the S&P 500 Index posted 13 declines of more than 20% since World War II. The table below shows the S&P 500’s returns from the highest point to the lowest point in a downturn. Bear markets average a decline of 32.4%, and generally last around 355 days.

Bear markets have occurred as close together as two years and as far apart as nearly 12 years. A secular bear market refers to a longer period of lower-than-average returns; this could last 10 years or more. A secular bear market may include minor rallies, but these don’t take hold.

A cyclical bear market is more likely to last a few weeks to a few months and is more a function of market volatility.

Peak (Start) Trough (End) Return Length (in days)
May 29, 1946 May 17, 1947 -28.78% 353
June 15, 1948 June 13, 1949 -20.57% 363
August 2, 1956 October 22, 1957 -21.63% 446
December 12, 1961 June 26, 1962 -27.97% 196
February 9, 1966 October 7, 1966 -22.18% 240
November 29, 1968 May 26, 1970 -36.06% 543
January 11, 1973 October 3, 1974 -48.20% 630
November 28, 1980 August 12, 1982 -27.11% 622
August 25, 1987 December 4, 1987 -33.51% 101
March 27, 2000 Sept. 21, 2001 -36.77% 545
Jan. 4, 2002 Oct. 9, 2002 -33.75% 278
October 9, 2007 Nov. 10, 2008 -51.93% 408
Jan. 6, 2009 March 9, 2009 -27.62% 62
February 19, 2020 March 23, 2020 -34% 33
June 2022 June 8, 2023 -25% 248
Average -34% 401

Source: Seeking Alpha/Dow Jones Market Data as of June 8, 2023.

What Causes a Bear Market?

Usually bear markets are caused by a loss of consumer, investor, and business confidence. Various factors can contribute to the loss of consumer confidence, such as changes to interest rates, global events, falling housing prices, or changes in the economy.

When the market reaches a high, people may feel that certain assets are overvalued. In that instance, people are less likely to buy those assets and more likely to start selling them, which can make prices fall.

When other investors see that prices are falling, they may anticipate that the market has reached a peak and will start declining, so they may also sell off their assets to try and profit on them before the decline. In some cases panic can set in, leading to a mass sell-off and a stock market crash (but this is rare).

Is a Recession the Same as a Bear Market?

No. Bear market conditions can lead to or preempt recessions if the market slump lasts long enough. But this isn’t always the case.

What Is a Bear Market Rally

Things can get tricky if there is a bear market rally. This happens when the market goes back up for a number of days or weeks, but the rise is only temporary. Investors may think that the market decline has ended and start buying, but it may in fact continue to decline after the rally. Sometimes the market does recover and go back into a bull market, but this is hard to predict.

If the bear market continues on long enough then it becomes a recession, which can go on for months or years. That said, it’s not always the case that a bear market means there will be a recession.

Once asset prices have decreased as much as they possibly can, consumer confidence begins to rise again, and people start buying. This reverses the bear market trend into a bull market, and the market starts to recover and grow again.

Example of a Bear Market

The most recent bear market occurred in June of 2022, when the S&P 500 closed 21.8% lower than its high on Jan. 3, 2022.

While the Nasdaq and the Dow showed a similar pattern in early 2022, the decline of those markets didn’t cross the 20% mark that signals official bear market territory.

Bear Market vs Bull Market

A bull market is essentially the opposite of a bear market. As consumer confidence increases, money goes into the markets and they go up.

A bull market is defined as a 20% rise from the low that the market hit in a bear market. However, the parameters of a bull market are not as clearly defined as they are for a bear market. Once the bottom of the bear market has been reached, people generally feel that a bull market has started.

Investing Tips During a Bear Market

There are a few different bear market investing strategies one can use to both prepare for a bear market and navigate through one.

1. Reduce Higher-Risk Investments

When preparing for a bear market, it’s a good idea to reduce higher-risk holdings such as growth stocks and speculative assets. One can move money into cash, gold, bonds, or other less risky investments to try and reduce the risk of losses if the market goes down.

These safe investments tend to perform better than stocks during a bear market. Types of stocks that tend to weather bear markets well include consumer staples and healthcare companies.

2. Diversify

Another investing strategy is diversification. Rather than having all of one’s money in stocks, distribute your investments across asset classes, e.g. precious metals, bonds, crypto, real estate, or other types of investments.

This way, if one type of asset goes down a lot, the others might not go down as much. Similarly, one asset may increase a lot in value, but it’s hard to predict which one, so diversifying increases the chances that one will be exposed to the upward trend, and you’ll see a gain.

3. Save Capital and Reduce Losses

During a bear market, a common strategy is to shift from growing capital into saving it and reducing losses. It may be tempting to try and pick where the market has hit the bottom and start buying growth assets again, but this is very hard to do. It’s safer to invest small amounts of money over time using a dollar-cost averaging strategy so that one’s investments all average out, rather than trying to predict market highs and lows.

4. Find Opportunities for Future Growth

However, in a broad sense if the market is at a high and assets are clearly overvalued, this may not be the best time to buy. And vice versa if assets are clearly undervalued it may be a good time to buy and grow one’s portfolio. A bear market can be a good time to identify assets that might grow in the next bull market and start investing in them.

5. Short Selling

A very risky strategy that some investors take is short selling in anticipation of a bear market. This involves borrowing shares and selling them, then hoping to buy them back at a lower price. It’s risky because there is no guarantee that the price of the shares will fall, and since the shares are borrowed, typically using a margin account, they may end up owing the broker money if their trade doesn’t work out as they hope.

Overall, it’s best to create a long-term investing strategy rather than focusing on short-term trends and making reactive decisions to market changes. It can be scary to watch one’s portfolio go down, especially if it happens fast, but selling off assets because the market is crashing generally doesn’t turn out well for investors.

The Takeaway

Bear markets can be scary times for investors, but even a prolonged drop of 20% or more isn’t likely to last more than a few months, according to historical data. In some cases, bear markets present opportunities to buy stocks at a discount (meaning, when prices are low), in the hope they might rise.

Also there are strategies you can use to reduce losses and prepare for the next bull market, including different types of asset allocation. The point is that whether the markets are considered bearish or bullish, any time can be a good time to invest.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

FAQ

How long do bear markets last?

Bear markets may last a few months to a year or more, but most bear markets end within a year’s time. If they go on longer than that they typically become recessions. And while a bear market can end in a few months, it can take longer for the market to regain lost ground.

When was the last bear market?

The most recent bear market started in June of 2022, when the S&P 500 fell from record highs in January for more than two months.

Photo credit: iStock/Morsa Images

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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Sep
28
2024
How Midterm Elections Can Influence the Stock Market

How Midterm Elections Can Influence the Stock Market

By | Growing Wealth, invest, Investing | Comments Off on How Midterm Elections Can Influence the Stock Market

Midterm elections can introduce uncertainty and turmoil to the stock market. A change in power in Congress could lead to policy and regulatory changes that could impact the economy and corporate profits. As such, investors will be watching to see which party wins control of Congress and the implications for the stock market.

Historically, the stock market has underperformed leading up to midterm elections and bounced back in the year following the elections. Many investors use this historical precedent to predict how midterms will affect the stock market in the future. However, past performance is not indicative of future results. The midterm elections may be less important on the stock market than other economic factors, like high interest rates, inflation, and rising energy costs.

What are the Midterm Elections?

As the name suggests, midterm elections occur in the middle of a presidential term, as opposed to a general election. Midterm elections are when voters elect every member of the House of Representatives, and about one-third of the members of the Senate. The results of the midterm elections often determine which political party controls the House and Senate, which could determine the future of economic policy that may affect the stock market, and investors’ plans for buying and selling stocks or other securities.

History of Midterm Elections Results

Historically, the president’s party loses ground in Congress during the midterm elections. Of the 22 midterm elections since 1934, the president’s party has lost an average of 28 seats in the House of Representatives and four in the Senate. The president’s party gained seats in both the House and the Senate only twice over this period.

The flip in power during the midterm elections occurs, in part, because the president’s approval rating usually declines during the first two years in office, which can influence voters to vote against the party in power or not show up to the polls. Additionally, voters of the party not in control are often more motivated to vote during these elections, boosting voter turnout that can help the opposition party outperform the president’s party.

During the most recent midterm election cycle, in 2022, the Republican party won the House of Representatives with a 222-213 seat majority. The Democratic Party maintained a majority in the Senate, with a 51-seat majority.

Stock Market Performance During Year of Midterm Elections

Leading up to the midterm elections, the stock market tends to underperform. Since 1962, the average annual return of the S&P 500 Index in the 12 months before midterm elections is 0.3%. In contrast, the historical average return of the S&P 500 is an 8.1% gain.

This underperformance during the midterm year follows the Presidential Election Cycle Theory, which implies that the first two years of a president’s term tend to be the weakest for the stocks.

However, it’s unclear whether this downbeat performance and stock volatility in the year preceding the midterms is a function of investors’ views of potential election outcomes and subsequent policy changes.

Some analysts say that the underperformance occurs due to uncertainty about the election’s outcome and impact, and investors don’t like uncertainty. But others say that the more critical impact on the stock market is the state of the economy; factors like the Federal Reserve’s monetary policy, energy prices, inflation, and the state of the labor market are more important to the stock market.

Recommended: How Do Interest Rates Impact Stocks?

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Stock Market Performance Following Midterm Elections

Even though the stock market, as measured by the S&P 500, has historically underperformed leading up to the midterm elections, stocks have tended to overperform in the post-election environment. Between 1962 and 2022, the 12 months after midterm elections, the S&P 500 had an average return of 16.3%.

The gains in stocks following the midterm elections have occurred due to no single factor. One reason may be that investors prefer the certainty of knowing the makeup of the federal government and potential policy changes.

Moreover, some believe that because the president’s party typically loses ground in the midterm elections, it reduces the likelihood of policy changes that could have a negative impact on the economy. This, in turn, can provide a tailwind for stocks. The potential for gridlock, rather than sweeping policy and regulatory changes, is usually welcomed by investors.

How Did the 2022 Midterm Elections Affect the Stock Market?

It is always difficult to say how any midterm election cycle will affect the stock market. But we can look at the most recent midterm election, in 2022, to get a sense. Immediately following the election, on November 8, 2022, the S&P 500 did see an increase – but in December, the market later fell before gaining steam again in January.

So, it’s difficult to say how much the elections weighed on the markets, aside from other factors. During that time, for instance, rising inflation and interest rates may have been playing a larger role in the market’s performance than other variables.

But broadly and historically, again, the most obvious way the midterm elections could impact the markets is that if one party or the other gains control of Congress, that could influence economic policy and the country’s direction. This could lead to tax policy, regulation, and spending changes that could impact businesses and the stock market.
Another potential impact of the midterm elections is that if there is a change in control of Congress, that could lead to more investigations and subpoenas of businesses and individuals, which could create uncertainty that investors and the markets may not like.

The Takeaway

The history of midterm elections is one of cycles: the party in power typically loses ground during midterm elections, and the opposition party typically gains ground. And these cycles are also evident in the performance of the stock market, with muted stock gains in the year of a midterm election and substantial gains the year following the elections.

But despite these historical trends, no one can say for sure how the midterm elections will impact the stock market. And investors shouldn’t necessarily rely on these trends when making investing decisions. Instead, investors might want to try and maintain a long-term view to reach financial goals, avoiding the short-term noise and uncertainty of elections and politics. Investors should continue to focus on asset allocation, risk tolerance, and the time horizon of a diversified portfolio to achieve financial goals.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

¹Opening and funding an Active Invest account gives you the opportunity to get up to $3,000 in the stock of your choice.

Photo credit: iStock/Drazen_

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest is a trade name used by SoFi Wealth LLC and SoFi Securities LLC offering investment products and services. Robo investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser. Brokerage and self-directed investing products offered through SoFi Securities LLC, Member FINRA/SIPC.

For disclosures on SoFi Invest platforms visit SoFi.com/legal. For a full listing of the fees associated with Sofi Invest please view our fee schedule.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

¹Claw Promotion: Probability of Member receiving $1,000 is a probability of 0.026%; If you don’t make a selection in 45 days, you’ll no longer qualify for the promo. Customer must fund their account with a minimum of $50.00 to qualify. Probability percentage is subject to decrease. See full terms and conditions.

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