2022 was the year of the bear (market)! While there were pockets of strength, the overall market was just tough last year. And that goes for bonds as well. Everyone knows this info by now. But what is a “bear” market, and why do they happen? I think it is important to understand the answers to these questions.
What is it? This is what Forbes magazine says:
Economists define a bear market as a decline of 20% or more of a major stock market index, such as the DJIA or S&P 500, for a sustained period. A bear market is the opposite of a bull market, a period marked by market gains of 20% or more. On average, bear markets occur every 3.5 years, usually lasting for several months.
Why do they happen?
Well, they actually happen as a part of a standard business cycle. Economies grow/contract as part of normal, long-term ebbs and flows. Bear markets are usually associated with the contraction phase of the cycle…typically, the very end of it, to be exact.
But, more importantly, we consider bear markets to be more of an “emotional” phenomenon than a “technical” one. In other words, a bear market works to clear out “irrational exuberance” and excesses that were created in the system during the “boom” part of the economic cycle. The depths of a bear are often coincidental with a lot of pessimism, poor investor sentiment, and a general malaise amongst investors. That emotional reaction ends up creating the stage for a new, long-term economic expansion and bull market, at least historically.
So, while there are some technical developments we need to see happen, often, it is more important to look at some of the less tangible “data” out there that would reflect the emotions of investors. That data suggests that investors feel quite dismal. That doesn’t mean things can’t get worse, but a lot of “emotional” damage has been done. A bear market can inflict its pain via massive losses (2000-2002/2008), or it can simply wear down morale over a long period of time, where investors simply become frustrated and “give up.”
Of course, we don’t know how or when we’ll come out of the “bear” that we entered in 2022. We do feel confident that the majority of the pain is behind us. But, it is our suspicion that this bear market will be one that succeeds by simply wearing investors out. We are essentially one year into this frustrating cycle. And, while we don’t currently expect the market to have another significant down-trend, it is probably going to take us a while to work through all of the excesses created in previous years. Stay patient. Good things will come…eventually.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. Economic forecasts set forth may not develop as predicted.