We have a series of articles called “A Guide to Bear Markets” where we track and review each Bear Market in the S&P 500 to see what we can learn from them. A Bear Market is defined as an index dropping at least 20% from some previous high. Smaller drops in the market between 10% and 20% are called “corrections.” Larger drops of at least 50% are called a “crash.” As I write this, the S&P 500 Price Index is currently in its eleventh bear market.
While it is relatively straightforward to write a guide to every bear market, it is difficult to write “A Guide to Bull Markets.”
A bear market is simple. You find the last high close of the markets and you measure the percent down you are. If it is more than 20%, it’s a bear market.
If you apply that logic to Bull Markets though, what prior close do you pick to measure performance from? If you pick the last peak close, then either you are always down from the prior peak or you are measuring performance from right now… now… now…
If you try to pick some low point, which low point do you pick?
As of the July 1, 2022 S&P 500 close of 3,825.36, while we are currently -20.25% below our prior high of 4,796.56 (January 3, 2022), we are +70.97% above the relative low of 2,237.40 from the last bear market, The COVID Bear Market (March 23, 2020). Put that way, even our bear market sounds bullish.
Investopedia defines a bull market this way:
There is no specific and universal metric used to identify a bull market. Nonetheless, perhaps the most common definition of a bull market is a situation in which stock prices rise by 20%, usually after a drop of 20% and before a second 20% decline. Since bull markets are difficult to predict, analysts can typically only recognize this phenomenon after it has happened.
In other words, a bull market is a period of time between two bear markets when the stock market gained at least 20%.
Or an easier way to measure: The return of a Bull Market can be measured from the relative bottom of the last Bear Market to the last peak close.
The problem with this is that there is no way to know when your bull market has started. You have to wait until the markets recover to a new peak close and by then you’ve missed the recovery.
Put more plainly: As of the July 1 close of 3,825.36, we are currently up +4.33% from our recent relative low of 3,666.77 on June 16, 2022. Is the Bear Market already recovering, the market will keep going up, and we have started the next Bull Market? Or is this just a small reprieve and the Bear Market will continue on this week when the markets open?
If studying prior Bear Markets has taught us anything, it is that the stock market is inherently volatile. Take the wild ride of the 2020 COVID Bear Market as an example. The relative bottom of the Bear Market was officially on March 23, but many market timers attempted to “sell the bounce” (an unwise market timing strategy) selling while the market was 80% or so recovered before the supposed second drop came. No one knew if the markets would finish recovering or if a second drop would come. It didn’t end up coming, and the market hit a new peak close on August 18. This means that after March 23, we were already in the next Bull Market; we just didn’t know that yet.
From the March 23, 2020 relative bottom of 2,237.40, the 2020 COVID Bull Market was a +51.51% gain to the August 18, 2020 first new peak closing of 3,389.78 and a +114.38% gain to the final January 3, 2022 peak closing of 4,796.56. I pity the investors who missed out on any part of that recovery because they lost their nerve during the decline.
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.
We have no crystal ball over here at Marotta. We strive to utilize a portfolio strategy that does not require market timing to be successful. We think the contrarian effect of rebalancing on a historically justifiable portfolio gives the best chance of weathering the market ups and downs. We take comfort that studies in the markets suggest that investing funds immediately is typically very advantageous and even the literal worst market timing is better than not investing.
In our limited experience, there is only one anecdotal indicator that we’ve found that signals the bottom of the market: the day that panic swells so large that we cannot convince a client to stay invested, that day is the bottom of the market. You can read more about this experience of ours in “Remembering The 2008 Crash as a Financial Planner.”
So far this time around, we’ve been able to keep all of our clients from flat-lining (what we call selling to cash during a downturn in the markets), and I hope we keep it that way.
If you ever feel like flat-lining to cash, I hope this remembrance will serve as a word of caution: Stay the course. The recovery may be tomorrow.
If you sell to cash when the markets go down, it almost never turns out well. It ruins a retirement plan. It impoverishes an otherwise brilliant investment strategy. And it isn’t just the numbers. This is your life. Your financial freedom and financial needs are at stake. Sometimes, you don’t get a second chance to be brave. Stay the course. Invest. Rebalance. Don’t peek.
The stock market is a powerful financial asset for those wise enough to remain invested and diversified during all kinds of economic movements.
Photo by Juan Domenech on Unsplash