Bulls, bears, recessions, perceptions

Most people say the current bull market started in March 2009 and so there is often talk about how long the current one has gone for, how we are “due” for a correction, whether one should leave money in cash waiting for that inevitable correction, and so on.

Many months ago I wrote a very similar blog post about the claim that the current bull market really only started in 2013 when the recovery from the 2008 crash was complete.

There have been a few other articles by others recently that extend this argument in other directions.

To an extent, some of this argument feels like quibbling about precise definitions. There’s certainly some of that: the internet tendency to argue over very small differences of opinion and fact.

I’m also interested in this because it is a kind of push-back against the dominant financial news narrative — “There’s Always a Bull Market in Fear Mongering” — and I think we need countervailing forces. But I’m also interested in how people actually live through experiences but then reinterpret them based on those dominant narratives.

Bear Markets: The S&P 500 versus your portfolio

When we talk about bear markets it is always a bit unclear what we’re talking about. The DJIA? The S&P 500? The Wilshire 5000? I think most people nowadays mean the S&P 500.

Unless your equity portfolio is 100% invested in the S&P 500, though, it isn’t clear how useful a benchmark that is. Surely we should care if our portfolio is in a bear market. It isn’t hard to see that if you have international or small caps your portfolio might be in a bear market but the S&P 500 might not be.

Michael Batnick makes an argument somewhat along these lines about the middle 2015–early 2016 period. (Remember January 2016, “the worst January ever”, when the sky was falling?)

And while the S&P 500 fell just 15% from the middle of 2015 until early 2016, I believe it absolutely was a bear market. Below are some of the peak-to-trough numbers that support this idea.
S&P 500 -15% (Median stock -25%, nearly 80% of S&P 500 stocks were below their 200-day moving average.)
Russell 2000 -27%
Japanese Stocks -29%
Dow Jones Transportation Average -32%
Emerging Market stocks -40%
Chinese stocks -49%
Small Cap Biotech -51%
Oil -76%
NYSE new 52-week lows were at their highest point since November 2008, which is shown below.

So was this a bear? I think Batnick makes a strong case. So is our current bull barely over a year old then?

Bear Markets: arguing about fractions of a percent

What exactly is a bear market anyway? A drop of 20% seems to become the Common Wisdom™. A drop of 15% is just a “correction” and not a “bear”. But what about a drop of 18%? Still not a bear? A drop of 19%? What difference does that extra 1% really affect?

JC Parets has a nice post on the craziness of this kind of reasoning.

In 2011 the S&P 500 fell by 19.38% when measured on a closing basis. (But why limit ourselves to a closing basis?) Is the difference between 19.38% and 20% really what separates a bear from a not-bear?

Remember, in order to maliciously try to mislead you, they are choosing to use the S&P500 Market Cap-Weighted Index to determine Bull & Bear Markets using their arbitrary 20% level as the threshold. Meanwhile, in 2011, the S&P500 Equal Weighted Index fell over 25% from peak to trough

So we can see the many problems with loose talk about “the current bull market”

  • It is a cherry picked index: the S&P 500 market-cap weighted index.
  • It is a cherry picked set of data points: using closing prices instead of intra-day prices.
  • It is an arbitrary threshold: 20%.
By January of 2016, Emerging Markets were down 45% from their peak in 2011. Was that a bull market too? Europe and Japan each fell around 30% from their 2015 highs. Were those bull markets? The Russell 3000, which represents approximately 98% of all investable assets in the United States equities market fell 23% from the 2011 highs. Was that a bull market? The ACWI (All Country World Index) fell 27% in 2011 and 22% in 2015. Bull markets also?
The bottom line is that we’ve had plenty of bear markets since 2009.

Investor sentiment and the rewriting of history

Let’s step away from technical arguments about exactly what does and does not constitute a bear market.

When stocks drop even 10% investors freak out. When they drop 15% they freak out even more. There were lots and lots and lots of people who were invested in 2016 and 2011. They lived through those 15% drops, 19% drops. They saw their Vanguard Total Stock Market fund drop 17% in 2011. They saw their Vanguard Total International Stock ETF drop 20% in 2014. They saw their Vanguard Small-Cap Value ETF drop 24%. They saw their Vanguard REIT Fund drop 17% in 2011.

Why does the average investor not remember those drops? Don’t they read the headlines about a 9 year bull market and go, “Wait a second, I remember a lot of sleepless nights pretty recently when my portfolio was getting hammered!”

Do we really need to read a news article to tell us how our own portfolios have been doing?

…but I think the answer to that is actually “yes, we do”.

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