Bear Market Bounces: Rhetoric Vs. Reality - What Is Real?
2022 has been tough so far: War, pestilence, inflation and now, very possibly, famine.
The financial markets aren't helping to lighten the mood. This week was another negative one for the markets and it can often seem that, at times, like nothing will reverse the prevailing trend.
In the same way that 6 months go, everything seemed to be pointing upwards, a few (significant) changes have now ensured that gloom has descended so swiftly and completely that it can feel almost permanent in its totality.
However, here are two points to keep in mind:
The current negativity is very unlikely to last. Not only will the market recover over the long term but sooner rather than later it is likely there will be a significant bounce.
More importantly, however, is that some/many single name companies may not bounce when the market does.
There are many companies that could not reach their all time highs again for years, if ever. Many of these companies are great companies!
They are innovative, interesting and with powerful business models but they were extremely expensive. Incredible expensive. Record level expensive.
There were some reasons for those price levels. Some of them might have even been good reasons but there is no real guarantee they will see those levels any time soon.
We are likely in a different regime now.
Inflation is high, nominal growth is high but slowing, real rates are rising, the labor market is tight, the central banks are trapped.
All of these points are true individually and, more importantly, add them up and you get a very different mix.
So, be aware. If you have dabbled in single names (we suggest you don't!) and are now still holding and hoping against hope that the incredibly rich prices of early or mid-to-late 2021 reoccur be ready for either a very long wait or profound disappointment.
But the wider points is an even more important one: if the markets bounce, is it real?
That is really the question, isn't it?
Well, it is unlikely that we will be able to time the market. That is hard enough at the best of times and picking the bottom of a true market spiral like what we are experiencing now is even tougher.
So, we are pretty skeptical of anyone being able to nail the bottom of the current decline. We are far more positive that a bottom will occur.
But we are even more skeptical that one will occur any time soon. The list of conditions we outlined above are simply too consequential and difficult to reverse over even the medium term to be able to send the markets
That is not to say that, if a bounce occurs (and one could have begun on Friday) it could not be very strong and very short term positive.
Keep in mind:
After 2000, the Nasdaq had 16 bear market rallies of at least 10%+ and averaging an impressive 22.7% before bottoming out down 78%
After 1929, the Dow had 10 bear market rallies of at least 10%+ and averaging a scarily similar 22.8% before bottoming out down 89%.
And this seems to be the scariest part of a bear market - the bounces.
Because they are very real, very swift and can quickly convince a lot of investors that, actually, good times have returned again and they were overreacting.
That is very often a major mistake. This is especially the case when natural human psychology takes over and investors get greedy for more. MORE!
Only then to have their hopes dashed and the market head back down towards new, new, new lows.
So, if you get a bounce, and one could have begun on Friday with a 3% pop, our suggestion is not use it as an opportunity to celebrate "Buying the Dip" but rather as an opportunity to do some serious house cleaning and allocate out of your losers and sectors out of favor and into the new winners.
So, in summary:
Take care, brush your hair and don't get too greedy in a bear market bounce.
Speaking of positives, here is one member of the new class of winners.
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