Just when it looked like the market might be on the mend, pow! Thanks to the 6.6% pullback from last week's high, the S&P 500 (^GSPC -0.04%) is now 20% below its January peak. That's bear market territory -- again -- against a backdrop of economic trouble. For instance, the Federal Reserve remains open to more rate hikes to combat lingering inflation, while homebuilder confidence has now tumbled for a 12th consecutive month.
Translation: Stocks could have further to fall before reflecting the true condition of the economy.
The prospect of more market downside, on the other hand, certainly isn't etched in stone.
The thing is, if your fear of additional losses is greater than your fear of missing out on a rebound, you're looking at the matter in the wrong light. Even if more downside is in the cards, the 20% setback from a record high is a compelling entry point whether or not we've already seen the bear market bottom.
2 reasons to be bigger-picture bullish here
Don't misinterpret the message. The inherent risks of market-timing remain in play, and the philosophy behind "forever" holding periods still applies.
But, there's also a time for level-headed discretion. Down 20% from January's peak, the S&P 500 is likely closer to a major low than not. If you can get in closer to such a bottom than a major high ... well, you're doing pretty well.
That being said, there are a couple of reasons you may want to go ahead and take the plunge here even knowing a bit more selling could be in store.
One of these reasons is the S&P 500's current valuation. Although the analyst community generally expects this year's economic headwinds to bleed into next year, the bulk of that weakness may already be priced into stocks. The index is now priced at only 16.8 times the coming year's projected per-share earnings (which should still be about 13% better than this year's likely bottom line for the S&P 500, by the way). That's as cheap as stocks have been since coming out of the subprime mortgage meltdown of 2008, save the market's short-lived blip in late 2018.
Data source: Standard & Poor's. Chart by author.
Although not shown on our chart above, the S&P 500's trailing-12-month price-to-earnings ratio is in the vicinity of 18 as of this writing. That's also as cheap as the index has been on a backwards-looking basis in years, again with the exception of 2018's temporary turbulence.
The other reason it's safer to start wading back into stocks rather than continuing to shed them? Time. The calendar says this bear market is closer to its end than its beginning.
Brokerage firm Charles Schwab crunched the numbers, finding the average bear market lasts on the order of 15 months. Starting the proverbial countdown clock at January's peak would put the bottom somewhere in the middle of April. The average bear market also pulls the S&P 500 about 38% below its peak.
We're clearly not at either of those points yet. And in that these figures are only averages, it's possible this bear market could last longer than 15 months, dragging the S&P 500 to an ultimate loss of more than 38% before a bottom is reached.
Data by YCharts.
As Robert Burton warned the world way back in the 1600s, though, let's not be "penny-wise and pound-foolish." There's also a chance this bear market could end sooner than the average one does. And given how some of the market's very biggest gains are seen right at the onset of new bull markets, the bigger risk remains not being invested at the onset of a new bull run rather than being invested before a bear market has run its full course.
You may also want to keep in mind that, more often than not, stocks are predictive rather than reactive. That is to say, they'll likely start edging higher before it's crystal clear the economy as well as earnings are on the mend. The catch? You won't see this turn taking shape until well after it's underway.
Don't forget what you're really trying to accomplish
Admittedly, stepping into new positions while stocks are falling feels a bit like catching a falling knife. It's scary, and there's a chance you can hurt yourself.
If that's how you're seeing things right now, however, you may be losing sight of the bigger picture.
The fact is, you can't control or even predict what the market's going to do in the short run. You don't have to successfully make such short-term predictions, though. Investing has always been best approached as a long-term game won by people that can remember this reality when the market's struggling: Ten years from now -- or even just five years from now -- most stocks are likely to be much higher than they are right now, and this year's bear market will be little more than a fading memory then. Whether you got in 20% below this year's high or 38% below that peak won't matter enough to justify the risk of holding out for what looks like the absolute bottom.
In other words, go ahead and step into those discounted, quality stocks you're eyeing and tuck them away for a few years. It'll be fine.
