Inside October’s Spooky Reader Mailbag

Halloween is nearly here, so in lieu of spooky puns, how about we open the mailbag and see what candy … err questions are on you fine folks’ minds?

Are bear markets hard to predict?

We would say they are impossible to predict, if we are using the strict definition. That is, there is no strict criteria one can use to say, with confidence, that there is a high likelihood a bear market will start at a specific, future point. We can look around and assess whether the conditions that would typically accompany a market peak are in place, but we also know that euphoria can run for a while. The dot-com world was super sloppy for most of 1999, for example, but stocks kept romping until March 2000.

Now, what we do think is possible is identifying a bear market early enough in its lifespan to do something about it. This is not technically a prediction of a bear market. It is the observation that a bear market is quite likely already underway, at a time when there is a high likelihood that there is considerably more downside ahead than behind.

This is when we think there can be a rational case to reduce equity exposure. If you are three months into a downturn, the market is down by about -6% and you have well-founded reasons to expect it to continue falling for a protracted period and breach -20%, then it can be beneficial to reduce stock exposure. If you are down -19% and see it probably crossing -20%, then it probably isn’t unless you have a very, very, very good reason to think it might get to -40% or whatever. These numbers aren’t airtight guidelines, mind you, they are illustrations.

In our view, one of the biggest risks a long-term growth-seeking investor can take is being out of stocks. If you are on the sidelines and miss bull market returns, it can be a major setback to reaching your goals. Hence, it is important not to get fooled out of stocks by a correction (sharp, sentiment-fueled drop of -10% to -20%). Similarly, you don’t want to jump out of stocks late in a bear market and miss the rebound.

So we find it helpful to assess downturns with some general filters. Bear markets tend to average out to a monthly decline of about -2%. This does not mean they lose -2% month in, month out. It means the total cumulative decline, averaged out on a monthly basis, would translate to about -2%. We also know that the biggest declines tend to come late in a bear market, in their panicky last stage, and not at the beginning. So if you get a sharp downturn out of the gate, chances are it is a correction or, if it is a bear market, there may well be a better exit point. Either way, what would most raise our eyebrows would be a slow rolling decline.

When assessing whether a bear market is underway, we do a lot of work to identify whether the market is about to get walloped by some massive negative no one is paying attention to or whether there is too much excess and too-high expectations, which a bear market would need to squeeze out. It is a bit art, a bit science, and a whole lot of qualitative and quantitative analysis.

And for you, the good news is that MarketMinder is here to keep you updated on this analysis. We won’t always be right, but we will show how we arrived at our opinions.

How long are bull markets?

It varies. Using S&P 500 data from Global Financial Data, Inc. and FactSet, the median bull market length since 1932—excluding the current one—is 4.5 years. But the actual lengths within that run the gamut from 1.8 years (March 2020 – January 2022) to 10.9 (March 2009 – February 2020). Age alone tells you nothing. An “old” bull market can have a lot of life left in it, while a “young” bull market could be near its end. So this bull market having just passed its second birthday is fun trivia but also pretty meaningless.

The same holds for bear markets. They run from a little over a month (February to March 2020) to as long as three years in the post-WWII era.

Any updated thoughts on the talk of the world moving away from the US dollar?

Our opinion hasn’t changed, but we have another fresh piece of evidence that this is all talk and not actually a thing. At last week’s BRICS summit, Russian President Vladimir Putin spent a lot of time calling for the countries to start their own cross-border payment system to take the dollar out of the equation. Russia being locked out of Swift and Euroclear due to sanctions, he has pretty high incentives to push this. The other countries (Brazil, India, China, South Africa and everyone else who showed up) were like, no, that is your problem, we actually want to keep using these systems and stay in good standing with the West. We mean, those weren’t the exact words, but that is our loose translation of the diplomatic jargon and the general sense that Putin’s proposal landed with a thud and crickets. Countries like complaining about the dollar … almost as much as they like using it.