What the F**k is a Bear Market, anyway?
Explaining down markets. For dummies.
On February 24th, I panic sold a handful of individual stocks because of Russia’s invasion of Ukraine.
Besides tragic inexperience, why did I sell?
The Dreaded Bear Market
In early February I expressed concerns of a bear market to a friend in finance.
“We’re already in a bear market,” she said with resignation.
But neither the S&P nor the DJIA had tumbled 20%, although they had fallen 10–15%.
Clem Chambers at Forbes says it better than me. There’s no use calling a bear market after your portfolio has dropped 20%. The use is recognizing signs a bear market is beginning, so you can sell out or trim profits.
Was my friend recognizing the signs, or was she conflating the term with another state of finance?
A bear market is defined as when price falls 20% from its peak. It can refer to an index, an asset class, or an individual stock. It can last anywhere from a few months to a couple of years.
A bear market eludes horror in traders and investors because it is neither suitable for entry points or adding on to your position, as lower lows are always around the corner.
When you recognize a bear market, it is often too late, due to hopium that:
It’s Just a Correction
The day after I sold, markets roared back. Well, f**k.
Another friend of mine, a mutual funds dealer, had advised me to HODL, saying:
This is no bear market, this is a correction!
So, my dumb ass rebought on February 25th, only to have markets tumble once again.
Corrections are relatively frequent, occurring on average 2.27 times a year. They happen in a bull market when investor sentiment gets carried away and overvalues a stock, index, or asset class. It denotes healthy market structure and can be used to re-enter the marker or for adding to a position.
A correction requires a 10% drawdown. It can be over with in a day or two, or consolidate at this new low for months… or even longer.
And it can get worse.
The Dreaded Recession
The bear market is now official.
Yet my two friends have completely different opinions on whether a recession will follow. Financial experts are equally divided.
A recession is signaled by surging inflation and major decline in almost all macroeconomic activity in a given region, significantly depressing equities, GDP growth, and unemployment rates.
Recessions are brutal and usually prolonged. But not always, as the 2020 recession lasted only two months.
Surely you’re thinking: if we just had a recession, surely another one isn’t on the way.
Unfortunately, that exactly thing happed at the beginning of the 1980s, and we could be looking at a Baskin Robbins menu of recession flavors: Take your pick.
Conclusion
Consider this:
Since 1974, five corrections have turned into bear markets.
Since 1929, only fifteen bear markets have become recessions.
Since 1928, we’ve had twenty-seven bull markets.
While all of these market cycles have definitions, it’s important to recognize they’re outlines rather then rigid. Market analysis is subjective.
For investors, novice or expert, it is very difficult to know which market cycle you’re experiencing (besides a bona fide bull market). Generally, hindsight is the most effective tool on clarifying these definitions.
If you’re in the depths of a recession, it can be tempting to add to your positions. But picking bottoms leaves you with smelly fingers.
Remember: Time in the markets > timing the markets.
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