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Stages of a Bear Market


I read a great article from Morningstar about “When Will Markets Recover.”  I thought about titling this article the same, but it felt too much like clickbait.  This article will talk about the stages that same Morningstar article talks about of a bear market, which is where we are right now.  So let’s get right to it.

 

The first stage is recognition that we are in a bear market.  Well, I’m pretty sure this is news to no one.  We entered a bear market in the fastest ever move since the Great Depression.  Heck, last week we saw a 13% drop in the market in ONE day.  Uggh.

 

Stage two – the panic.   We are definitely in this stage, at least in my humble opinion. I’m writing this Monday morning and have already talked to a half dozen clients. With everyone being home, my wife and kids are now getting a sense of what I do for a living, which isn’t sitting around posting on Twitter.

 

What makes stage two worse is what is happening with the “safe” bond market.  There are a lot of moving factors within the bond market.  Bonds are selling off to create cash due to demands of investors.  Also, lots of high yield (semi-junk) bonds are tanking as the underlying stability of the companies is now under question.

 

The only analogy I can think of with the past week is from old cartoons and I have Tom and Jerry in my head.  The skit is one where Tom steps on a rake and the handle pops up and hits him in the face.   Then he turns the other direction and steps on a shovel which also proceeds to hit him square across the face.  The rake is equity and for those investors who moved to the safety of bonds they’ve now stepped on a shovel.

 

Enough of that. Stage three is stabilization.  This is where things start to flatten out.  Stocks are no longer dropping and we recognize the cause of what drove the market into bear status. However, until that cause is eliminated the market will bounce around with some more volatility. Sadly, the non-fun rollercoaster ride is not over as this period can last the longest of all the stages.  

 

The fourth and final stage is anticipation.  This is where it feels awful and we start seeing headlines that it will never end and this is the new normal.  I love the example from Morningstar that in early 2009 they were holding an investment conference that was basically empty. The keynote speaker mentioned it would be months before the market recovered.  What happened the next day?  You guessed it – the longest bull market in history began its climb.

 

I liked this article as it was a reminder that we have been here before.  Again, I’m not predicting when this will end.  However, I do know we will eventually work our way back up that mountain one step at a time. It will be interesting to look back at when we were in what stages.  We certainly know there will be lots of books written about this time.