Are investors today truly BEAR AWARE? Meaning truly understanding what a bear market is?
To be clear, a bear market. Not a bare market which is, of course, totally different as you might imagine. Everyone understands that a bear market is a declining market rather than a bull market, which is a rising market. But, there are different types of bear markets, just like there are different types of real bears (black bears, brown bears, grizzly bears). So are investors fully aware of what type of bear (market) this year has become? Probably not.
I’m reaching way, WAY back now, into the experience sector of my brain to the 1970’s when inflation was rising, interest rates were being raised, and a multiple year bear market was in place. Hmmmm, sounds like today. That long running 70’s bear market is NOT what today’s investors are aware of, or prepared for. Today’s investors have become programmed to always “buy the dips.” They have equated the COVID-19, 2008 financial crisis, 2000 Dot.com and even the 1987 market crashes as “bear markets.” Those events were NOT bear markets but rather severe corrections within a long running bull market. Huge difference.
A strong case can be made that the long running bear market of the 1970’s ended in early 1980 when Fed Chairman Paul Volcker raised interest rates to (roughly) 20% to quash inflation. It worked. Slowly, but it worked. The same strong case can be made that the bond market began a 40 year bull run with interest rates declining from 20% to 0% and even negative. Those consistently declining rates also fostered a four decade bull market in equities.
So within that 40 year equity bull market, there have been several “Grizzly Bear markets.” If you know your bears (here in Montana, we do), you know a grizzly bear is extremely dangerous and will maul you. That’s what happened in the 1987 crash, the Dot.com bubble bust, the 2008 financial crisis selloff and the recent pandemic plunge. But, buying those dips worked well. Interest rates kept declining (thank you Fed and central banks??) and investors kept buying. Again, those were corrections not real bear markets.
Now, a true bear market has begun, and investors REALLY NEED to be BEAR AWARE.
After 40 years, interest rates are now rising to both quash inflation AND get rates back to “normal,” whatever that rate is. Let’s call this a “Black Bear market.” Again, knowing your bears, a black bear will rarely attack you but will be a nuisance. Live nearby, break into your house looking for food. Knock over trash cans, etc. You make a lot of noise and the bear runs away for a bit (like a rally in a bear market). But the black bear just keeps hanging around, making your life MUCH more challenging.
Hence, again, investors NEED to be VERY BEAR AWARE.
Multiple year bear markets linger on, markets erode, go nowhere and slowly decline. Frustrating. Financial markets get depressing and losses mount. Dip buying doesn’t work. Until…….investors can’t take anymore, give up and sell their portfolios.
It may take years, but that is a real bear market.
(Note: Don’t fall for any ‘scams’ claiming ways to beat a bear market. Bear spray won’t work and wearing a bear scat belt won’t either. Montana folks know!)