What Qualifies As a Bear Market ?

For many in the investment business, the technical definition of a “bear market” is – statistically anyway – a 20% correction.

Would you fire your advisor if the stock market saw a 20% correction in the next 4 weeks ?

Many would likely say “no” even though the statistical definition of a bear market was met.

When I struck out on my own in April – May, 1995, the US stock market, i.e. the SP 500, was in the earlier stages of a cumulative 125% rally from Jan 1, ’95 through December ’99, and like the great line from the Charles Dicken’s novel, “A Tale of Two Cities”, “it was the best of times; it was the worst of times” to try and hang out a shingle.

It was a “binary” stock market for 5 years, and as the monster rally went on, it became even more so as more and more equity sub-sectors and asset classes faded away, with “the market” powered by fewer and fewer large-cap growth stocks. Investors either won big investing in large-cap Tech and growth, or you went nowhere with value funds, emerging markets, and small and mid-cap investing styles.

The point being that there were several large and scary corrections during that SP 500 and Nasdaq rally: in 1997 the Thai bhat and Malaysian ringgit devaluation that led to rolling devaluations throughout Southeast Asia disrupted the SP 500 in the 2nd half of 1997. Then we saw the 1998 Long Term Capital Crisis, which resulted in Greenspan cutting short-term rates in the middle of a white-hot economy, and that’s just two nasty pullbacks in that record bull market.

The point is, I started hearing complaints from clients, particularly those with taxable accounts, where sizable capital gains were taken, and then the SP 500 was higher 3, 5, 6 months later, usually appreciably higher.

What I think fed this perception by clients was that they thought these were normal markets. I graduated with a Finance degree in May, 1982. The SP 500 had only one negative year of return between 1982 through 1999, and that was 1990, and that was triggered by the start of the First Gulf War, and at the time, although we didn’t know it, we were on the verge of the first banking crisis.

The clients didn’t like the dollar gains and paying the taxes, but all this did was eventually condition me to overstay my positions in large-cap Tech and growth stocks as we moved through 2000 and 2001. You can guess how that turned out.

Like myself, – back in the 1980’s and 1990’s clients had no conception of what a bear market was really like. The “1987 Crash” was essentially a 1-day bear market.

Summary / conclusion: It’s mind-numbing to read Twitter and the blogosphere about bear markets and such. I tell clients today and particularly new clients that you will see a lot of scary corrections in your investing lifetime, but the big threat for you as investors is the permanent impairment of capital, like the biotech crash in the early 1990’s or the Nasdaq collapse from 5,100 in March, 2000, to the low near 1,100 in October of 2002. The SP 500 peaked at 1,575 in October of 2007, and didn’t overtake that level again until May, 2013. The Nasdaq Composite had even longer period between all-time-highs: from March of 2000 through early 2017.

A 6-year hiatus between all-time highs can be a considerable period, particularly if one is retired.

Market valuations today are nothing like the late 1990’s and what made that period so challenging is that portfolio managers heard for 5 years how overvalued the Nasdaq was, and growth stocks were, and Tech was, and yet the Nasdaq rally went on, and on….and on….

The last aspect to this is that – after client’s survived 2000 through 2009 – now they see calamity around every corner. Sentiment is the opposite of the 1990’s today.

This late April ’18 blog post covered it well I thought.

Thanks for reading…

 

 

 

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