It's a Bear

by Danno

June has picked up right were April and May left off... terrible!

We are officially in a "bear market" as of the close of business on Monday (defined as being down 20%+ in the S&P 500).  Second one since the start of 2020.  And this one is tricky because Bonds have been getting beat up too, as the Fed raises rates in an effort temper the amount of Demand and inflation in the economy.   

The markets be like...

Folks still in their peak earning years who understand that stuff is "on sale" be like...

Recent retirees who just got done saving money every 2 weeks for 40 years be like...

My job is to be like...

  

It's not a reason to panic, but it's certainly enough to get your attention.

Back in 2020 the S&P went down 35% in 6 weeks, and rebounded in a V-shape, almost as quickly. We were worried about deflation & a depression, and the Fed stepped in to provide support.  This one is not like that.  This one has been going down for 5 1/2 months now.  While much of the damage appears to have been done already, it looks like we're not quite done yet. We'll see. 

This has been like watching Dominos in slow motion...

First the unprofitable hyper-growth, SmallCap Growth, meme stocks, and SPACs (i.e. more speculative stuff) tipped over in early-February 2021.  Think -50% to -90%.

SmallCap Value and cryptocurrencies tipped over in early-November 2021.  Think -40% to -70% (Bitcoin).

LargeCap Growth tipped over in December 2021.  Think -30%.

LargeCap Blend (S&P 500) tipped on January 3, 2022.  -22%.

LargeCap Value tipped over in mid-April 2022. Think -10%.

The more speculative and the "growthier" the asset, the higher the surge, and the nastier the crash.  It's almost that simple.  

When everything is going up, you wish you didn't have any Cash.  When things are going down, you wish you only had Cash, even though that's been the worst "investment" over the long-term.

That's the Fear and Greed in action.  

I recognize that doesn't feel good day-to-day right now (hopefully you aren't paying close attention to the day-to-day), and it doesn't feel good for me either.  But if you know your history, you know that investing frequently doesn't "work" in the short-term, but it has always worked in the long-term.  

And just like how the "hot" stocks eventually run out of juice (i.e. buyers) to the upside and exhaust themselves, they eventually run out of sellers to the downside, and the bulls take back control. 

I'll just leave you with this piece from "Guide to the Markets" by JP Morgan Asset Management thru 05/31/2022.   These are the "Bear" markets in the past 100 years:

Under "Macro” environment, they oversimplify the "causes" to 4 things: Recession, Commodity Spike, Aggressive Fed, and Extreme Valuation.  In this case, we know that we've had a commodity spike, an aggressive Fed, and stretched valuations.  We don't know yet if that will result in a recession.

Even if we did know whether we will technically have a recession or not, we don't know how much of that is already baked into the current prices, and good luck calling the bottom.  

A recession is defined as 2 consecutive quarters of GDP contraction. Historically, on average, the market bottoms less than a month after we are able to declare an "official" recession.  A bear market does NOT mean that there has to be a recession.  However, it’s fair to say that the odds are going up.  

For your own safety and for the safety of others around you, please remain seated until the seatbelt sign has been turned off.

Now go drop some knowledge on a friend.   I'm out. 

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