June 7, 2022

When Will The Bear Market End?

A quote by the celebrated fund manager Sir John Templeton states, "Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria." Investors are anxious right now, and it's understandable.

2022 - An Uncommon Year

Now, rattled by Russia and China, battling rising costs and a potential recession, one must ask: When will the bear market end? While there is no specific answer to the question posed, there are signals and technical measures that provide some guidance. Looking from the portfolio management perspective, those are the parameters we must operate from to minimize capital destruction and limit emotionally driven mistakes.

Warren Buffett tells us that situations like these are an opportunity to be greedy, not fearful. Yet, this understanding tends to be easier said than done.

The year 2022 has been unlike any other that many investors have witnessed in their investing lifetimes. While some went through the 2008 bear market, there are fewer still who lived through the "Dot.com" crash. The nature of "real" bear markets tends to destroy investors and drive them from permanently investing in the financial markets.

While many "buy and hold" practitioners suggest investors dollar-cost-average their way through a downturn, reality tends to be far different. There is a point when markets decline enough where every investor changes from "Buy The Dip" to "Get Me Out."

Buying First, Asking Questions Later

According to a Schwab survey, about 15% of all current U.S. stock market investors say they first began investing in 2020. The majority who opened their first non-retirement investment account that year were under the age of 45, a FINRA study found. Roughly 20 million people have started investing in the past two years.

Flushed with funds, "they bought first and asked questions later with meme stocks, SPACs, NFTs. There was a lot of what I call indiscriminate buying," said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management.

Berkshire Hathaway's Charlie Munger described the stock market as "almost a mania of speculation," adding that "we've got people who know nothing about stocks, being advised by stockbrokers who know even less."

The mood has shifted within digital communities like Reddit's WallStreetBets, where young investors gathered to post memes about stocks only going up during the good times. "Turns out investing is kinda difficult when the free money faucet is turned off," wrote one user, with another adding: "I blew up my savings and portfolio. I don't even have money to lose more money on the stock market, so I'll be out."

But seasoned pros say that's not the way to go. Here's what they suggest.

Don't Panic

"In every bear market, it feels like the end of the world is near while it's happening," Ben Carlson, manager at Ritholtz Wealth Management, wrote in a recent note. "In every bear market, we get some technical analyst who makes a 1987 or 1929 analogy using an overlay chart that makes it look like we're gonna get the mother of all crashes yet again."

When it comes to investing, most armchair portfolio management systems work great as long as markets rise. However, when the eventual correction comes, "loss aversion" psychology disrupts the best-laid plans.

So, with potential volatility looming as the Fed hikes rates and the economy continues to slow, let's get to the question at hand: How long will this bear market last?

From March 23, 2020, through January 3, 2022, the S&P 500 Index gained 114% (excluding dividends). That January 3 closing high through the recent low on May 19, the S&P 500 fell nearly 19%.

It should be somewhat encouraging to know that bear markets (not accompanied by recessions) tend to be milder. As we wait on pins and needles to see if the S&P 500 can hold its recent lows keep in mind:

  • Bear markets without recessions tend to last about seven months, and we've already been inside it for five months.
  • The only bear markets that took more than 46 days to bottom after the initial 20% decline were associated with recessions — 1970, 1973, 1982, 2001, and 2008.
  • Five of the past six non-recessionary bear markets saw the S&P 500 lose 22% or less.
  • Bear markets not accompanied by recessions have historically experienced smaller declines, losing an average of 24%.

Barron's just described the action in its June 2 "Review & Preview" email:

"A Different Market. It may still be a temporary bounce or a bear-market rally. Still, investor sentiment has significantly shifted in the last two weeks. Since the Nasdaq Composite bottomed on May 24, it's now up 9%. The seemingly bad news is no longer tanking stocks. In fact, in some cases, stocks are going up despite it."

This rising market is neither a momentary bounce nor a bear-market rally. And the choppiness is a vital characteristic of the stock market climbing a wall of worry.

Suppose the U.S. economy can avoid recession over the next 12 to 18 months. This sell-off may be over soon, and stocks could potentially run at their previous highs by year-end.

The Bottom Line

Focus on the new, emerging bull market and ignore everything else.

Today's past economic data analysis and in-arrears market evaluation are irrelevant. The Fed-caused fiat money inflation is here, and the 2021 bull market drivers have ended. And yet, good times are coming - it's just that they will be significantly different from before.

How different? One cannot know yet. It will be evolutionary. Therefore, joining forces with an expert now is a good strategy.

Mike Caffey believes in two things: his fiduciary commitment and beating the industry benchmarks. If you would like assistance navigating the current state of affairs or creating a lucrative investment management strategy for the future. Give us a call!