Broker Check

Bear Markets and Bears

November 15, 2022


I find many parallels and lessons when comparing economics and markets to the natural world, which means Mother Nature. Think about how Economists talk about market patterns, behavior, and predictions and compare that to how Meteorologists talk about weather patterns, behavior, and predictions. Economists and Meteorologists attempt to apply some degree of science, but there are just too many variables to be right all the time. In the end, both can serve as a general guide but risk being very wrong. 

The buzzword this year is "Bear Market," which got me thinking about the fact that I am dealing with two Bears on a daily basis. One in the Markets and one in my yard. They both share similar characteristics. Each started as interesting (never a good word), progressed to annoying, escalated into problematic, and became a challenging fixture of my life. Yet I know this too shall pass, and I will be all the wiser.

Here is a short video of the bear in my yard.

Simply put, a bear market is when the market falls 20 percent from its most recent high. Evidence of the slide started months ago, and on June 16, the S&P 500 made it official when it broke the 20 percent loss mark. At about the same time, I began to see evidence of my now resident, an actual Bear. Minor at first but continuously more common as the year rolled on. Falling markets can make people nervous, and turning over flower pots and garbage cans can make people (me) mad.Bear lesson Number One: You can significantly influence the outcome depending on the type of Bear and how you act.

Bear markets are normal. Since 1929 there have been 26 bear markets in the S&P 500 with declines of about 36%.(1) That means about 30% of the time, the markets are experiencing a bear. (Funny side note….Every single time it happens, someone has to say, "Yeah, but this time it's different.”) Talk of bear markets and recession, for that matter, do tend to be good for at least one thing – TV. I have had 5 Black bear sightings at my house in the past 13 years. It's certainly not normal, but it's not surprising anymore. It's become common enough that I must be prepared for a surprise and possibly damaging visitor. At home, I engage in "target hardening" (making it more challenging for them to get into things), and with money, we annually revisit time horizons. Bear lesson Number Two:The Bear is not uncommon, and you should expect it. As a result, you should prepare for it.

The average bear market tends to last about 9-10 months(2). It's natural for them to feel a lot longer as we tend to focus (obsess) on them. Just turn on the news. It's the brain's negativity bias at work again. When I've encountered bears on my property, there tends to be evidence of their visits for about a month. When you get up each morning and check for signs of damage, it feels like a much more extended period of time. They're usually juvenile bears that can travel hundreds of miles when pushed out of their original home range. Bear lesson Number Three: Bears do pass unless you do things that encourage them to stick around. Leaving food and garbage out for the bears makes them want to stay. You end up on their "circuit" of regular visits. A Market Bear may have technically passed, but investors tend to cling emotionally, or a hug would be a more topical language to the event. I'll blame this one on our survival tendency for recency bias. But the longer investors wait to re-engage markets, the harder a recovery can be.

There are different types of bear markets, and there are different types of wild bears. And guess what? They all tend to behave differently, first, with the markets. Event-Driven Bears, historically, are the shortest and the least severe. World events like the wars, 9/11, and COVID-19 serve as examples. The bear market in 2020 that resulted from the global shutdown forced by COVID saw the fastest recovery in history. The strange thing is that COVID seems to be with us forever. Then there are Structural Bears. Imbalances bring on these market downturns. Think 2008 with a bubble in loans or the .com bubble of the '90s. Structural Bears historically have hurt the most. It takes time for the excesses to work their way out of the system and restore investor confidence. Finally, there is the Cyclical Bear. Generally, considered part of the normal business cycle. These markets tend to fall between the Event Driven and Structural Bears from a depth and duration perspective. 

Many people will know that there are far more than three species of bears worldwide. Living in the United States, you could encounter three species of bears if you traveled West to the Rockies or to Alaska. The Black Bear is the most common and least aggressive. The Alaskan Brown Bear and the Grizzly are possibly the most aggressive. For you Naturalists, I may be splitting (Bear) hairs here. Each of these wild bears has known behaviors and tendenciesBear lesson Number Four: Knowing what kind of Bear you are dealing with can be beneficial. I won't get into all the details, but how you behave and the action you take when confronted by a Black bear or a Grizzley bear is VERY different. You may not take drastically different courses of action based on the type of Bear market we are experiencing. Still, understanding can go a long way for our emotional well-being. And that can only lead to better decision-making.

Whether you are facing a wild bear or a wild bear market, here are some practical things we should keep in mind. 

  1. If you are in their environment (the markets or the great outdoors), you risk an encounter. Prepare for it ahead of time. 
  2. Your behavior heavily influences the outcome of your encounter.
  3. What gets most people in trouble is what they don't know. Investors who "sell out" to stop their losses often worsen the problem by waiting too long for the "bear" to leave. HALF of the S&P 500 strongest days over the past 20 years occurred during a bear market. Another 34 percent of the best days occurred shortly after the end of the bear market(3). TIP: Grizzly bears, like most very large wild animal, are faster than you are (or ever were). 
  4. Neither Bears nor your investments care how you feel about them. Wanting to take a picture because you think they're cute is NOT a good excuse for getting too close. And wanting never to see your balance go down is not a good (in and of itself) reason to sell out.
  5. If you make a COMMON mistake (we call them common because they happen regularly), you could be a statistic. Every year a study is done by DALBAR. They review thousands of statements from retirement accounts and compare the performance to the funds available in those accounts. Each year for nearly 20 years, the results have been the same. Investors underperform the investments they own. How can that be possible? The long and the short of it comes down to getting into and out of the market at the wrong time. The industry refers to it as "Investors' bad behavior." Everyone has heard the saying, "by low, sell high," but no one is listening. Amazingly, in the 20-plus years I have been sharing the results from the study, not one person has claimed responsibility. I wonder where all these "bad-behaving" investors live. Apparently, they don't live in the Pittsburgh region.

For the most part, the COVID cuffs are off, and National Parks are back open. Most Americans do not have close encounters with wild animals regularly, and if they do, it's probably not a bear. Let me say…. "don't do it." Don't feed the bears, don't leave food out overnight, and don't try to get close because you want a better selfie.  

No matter what BEAR you may face this year, be prepared and exercise some common sense. 

Remember, you don't have to be faster than the Bear: )

Sincerely, 

Brian Pitell 

Sources:

  1. Seeking Alpha, The complete history of Bear Markets
  2. Seeking Alpha, The complete History of Bear Markets
  3. Hartford Funds, 10 Things you should know about Bear Markets

The views and opinions expressed in this commentary are those of the author noted and may or may not represent the views of The Lincoln Investment Companies and should not be construed directly or indirectly as an offer to buy sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on Sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. The S&P 500 index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. It is not possible to invest directly in an index. Past performance is no guarantee of future results.