We are currently in the S&P 500 Price Index‘s eleventh bear market. A bear market is simple. You find the last high close of the markets and measure the percent down. If it is more than 20%, it is a bear market.
On January 3, 2022, the S&P 500 reached a new peak closing at 4,796.56. Then, on Monday, June 13, 2022, the market closed at 3,749.63, -21.83% down and officially a bear market. From there, it slid a little farther into a relative bottom on Thursday, June 16, 2022 at 3,666.77 and then rose closing at a relative high of 4,305.20 on Tuesday, August 16, 2022, up +17.41% from June 16. From there the markets turned again, dipping down to a quarter close on Friday, September 30, 2022 at 3,585.62, down -25.25% from the January 3 peak close.
On July 4, 2022, we published the article “No Way To Tell If This Bear Market Is A Bull Yet,” and it is still true today.
There is no way to know what the markets will do. There are many possible futures which could produce any number of outcomes that would be normal market volatility. We could be in the next Bull market right now. We could still be in a Bear market.
When the market goes down, people like to ask why it is down. Everyone has their favorite reason. Right now, the narrative of high inflation and rising interest rates is particularly enticing. However, the market doesn’t follow the logic of our stories. Historically, all of the stated narratives have been true while the market was still going up.
Stock price is determined by the supply and demand of the free markets through market makers. The market goes down when there are more sellers than buyers. It is that simple. The value of a stock is what people are willing to pay for it.
Why are stocks valued less now than they were on January 3rd? Because investors are willing to pay less for them today.
When will stocks be valued more than they were on January 3rd? When investors are willing to pay more for them.
The stock market price is like the tip of a whip being cracked by someone going up on an escalator. You’ll get dizzy tracking the tip of the whip, but if you take a long-term perspective and watch the escalator, you’ll be able to relax and enjoy the ride.
The news says, “The market is going down,” but the market is not “doing” anything. Using the present progressive tense implies the action will continue until it clearly stops. But the market doesn’t work that way. Six sellers push the price down and three buyers push it up, so the price ends lower. It went down; it is not going down. What the market does next has nothing to do with what previous buyers or sellers did a moment ago. This is the random walk of the stock market.
Using the present progressive to discuss market corrections causes needless panic. While it is counterintuitive, the lower the market falls, the safer it is to be invested.
The market goes down when there are more sellers than buyers. Those sellers receive cash for their sales and cannot influence the market with those dollars until they place purchase orders. If they place purchase orders, then they push the price up. In this way, as the market goes down, the market becomes poised to either stay the same or go up. This is how downside risk decreases as the market falls. The cash on the sidelines only has the power to make the market go up.
The 2020 Bear market was just 33 days. In 2000, the Bear market lasted over 2.5 years. The average peak-to-trough of a Bear market is between nine months and a year. So far at nine months, the length of this Bear market is just average. Historically, every Bear market ends, and the market continues its upward appreciation. The market as a whole has never fallen forever.
If the price of the market tries to approach zero, you or I could take our pocket change and buy all the companies of the world. Long before that happens, Warren Buffet would wake up one morning and think that it was a great day to buy.
This is why the stock market as a whole will never go to zero. The companies that make up the market are worth far too much to be valued so poorly. Each company has employees, assets, patents, and contracts that are objectively economically valuable.
You could think about a Bear market as stocks being on sale. It is a good day to buy, hold, or rebalance – not to sell.
The market trends upward. It has bear markets, recessions, and crashes along the way, but it still trends upward. The longer the time period you look at, the less drops there seem to be. In the long-run, these dramatic dips are but V’s in the mountain chart. Stay the course. Rebalance. Don’t peak. You will be okay.
Photo by Hans-Jurgen Mager on Unsplash