The Risk in Being Bearish Now

After another nice day Thursday, US and global stocks have both retraced more than half their total declines as of last October’s low. The last time stocks retraced half their decline from January 2022’s highs, it preceded another leg down to a new low, so obviously these kind of “technical” indicators don’t necessarily mean all that much. It also helps explain why good cheer doesn’t abound. Many are skeptical of the rally for a wide array of reasons, from lofty valuations to alleged disconnects between economic reality and markets. Some argue this is a good exit point to take advantage of higher CD rates—or at least that it is too early to enter stocks. We think this ignores a very simple point: Over a year on from stocks’ last high, the risks of being bearish are likely greater than the risks of being bullish.

Averages aren’t predictive, and they are made up of extremes, but consider: Excluding 2022, whose official length and magnitude aren’t certain yet, S&P 500 bear markets since WWII averaged -34% declines in price terms over 15 months.^[i] Some were longer. Others were shorter and shallower. Friday will mark 13 months from the S&P 500’s prior peak, and Saturday will mark that anniversary for the MSCI World Index. Based on this history, the baseline probability of the bear market lasting much longer doesn’t appear high.

We realize this doesn’t exclude the possibility of another drop to new lows. We also realize that prospect is scary for many. But the final throes of a bear market, while sharp and painful, are typically short-lived. The V-shaped rebound that usually follows tends to erase them quite quickly, making that last -15% or so drop a distant memory. Remember 2009: That March 9, the day the bear market that accompanied the Global Financial Crisis hit its low, the S&P 500 closed down -24.6% on the year.^[ii] The MSCI World was down -24.8%.^[iii] But then came the rebound. Over the full year, including that early plunge, the S&P 500 rose 26.5%.^[iv] The MSCI World did even better, 30.0%.^[v] The recovery more than erased the late plunge.

In our view, the risks of missing the early rebound are greater than those of enduring the final plunge. Even missing the first 15% of a bull market can be a great setback, as you don’t just miss 15%. You miss the compound growth on that 15% over the entire bull market. Consider the growth of a $100,000 investment for two hypothetical investors. Jane has perfect timing and invested her $100,000 in the S&P 500 at market close on March 9, 2009. Jim chose to wait for an all-clear signal and jumped in at market close that March 17, when stocks were up 15% from the low.^[vi] When the market closed on February 19, 2020, the day the S&P 500 peaked ahead of COVID lockdowns, Jane had a cumulative 528.9% return, bringing her investment to $628,881.20.^[vii] Jim’s return was 446.4%, leaving him with $546,419.30.^[viii] Waiting a mere eight days would have cost our hypothetical friend tens of thousands of dollars in missed returns.

This isn’t to say pinpointing the low is possible—it isn’t. But the effort to do so is myopic—and that is the point. And the long-term impact of missing even some of an early bull market can be a very costly decision, potentially much costlier than enduring a decline that stocks quickly retrace. Stocks’ long-term returns include all bear markets along the way, with compound growth in good times wiping away the bad. This is the chief reason stocks are such a valuable vehicle for longer-term growth. The early recovery is the payoff for discipline in tough times. A decline turns into a loss only if you sell. If you grit your teeth and stick it out for the rebound, the next bull market eventually offsets it and then some, keeping you on the path to long-term market-like returns.