Quote of the Week
“You will never truly know yourself or the strength of your relationships until both have been tested by adversity.” – J.K. Rowling
Last week was a true Quad IV week. Actually it was the worst week of 2022. The S&P 500 was down -5.75%, the Dow was down -4.73%, the Nasdaq was down -4.76%, plus the Russell 2000 (the small cap index) was down -7.43%. All of the indexes except the Dow are in Bear Market territory. A Bear Market is defined as being down -20% or more from its high.
Yesterday (Tuesday) we had a nice little rally but it is running out of steam today. We are definitely trending down. The bond market has had some big moves on a daily basis but it doesn’t seem to be trending either up or down. The Mean Index which tracks bond volatility is at 130 which tells us to just watch for a while to see where interest rates shake out. We like to see the Index below 100. We lowered our bond positions last week.
We currently have 72% in cash, plus positions in gold, US dollar, and a small position in bonds.
Today we are adding small positions in energy exploration, US Brent oil, and China. China is the only major market currently in Quad II.
We are starting to see a rollover in home sales. US existing home sales hit a 2-year low last month down -3.4% month over month. It is not hard to understand why. Housing prices were up +0.5% last month and +14.5% year over year. Mortgage rates jumped +0.5% last week to 6.04% for a fixed rate 30 year loan according to Bloomberg. With interest rates so high and houses so expensive it looks like we may be topping out for home prices for now. If you are planning to sell and are holding out for a higher price you might want consider selling now. Don’t let “recency bias” cloud your decision. Also, if the stock market continues to decline, a lower wealth effect may start to dampen demand for any large asset purchase.
The “Typical” Bear Market
Spoiler alert: There is no “typical” bear market. Nonetheless, let’s start by looking at how long historical bear markets have lasted.
Imagine a back seat of kids on a road trip saying “are we there yet”?, You may be wondering about this bear market’s final destination, “the bottom,” Measuring from the bull market’s “top” to the bear market’s “low or the bottom”, the average since 1950 is 11 months. We are now six months into this bear market which implies we are just over halfway through this one. However, there is a massive degree of variability around that average length. That is why there is no such thing as the “typical” bear market.
For instance, the 2020 bear market lasted 1.1 months. You blinked, and it was over. On the other hand, the 2000-2002 “dot-com bust” bear market lasted a full 30 months. It was two and a half years of agony wondering, “Are we there yet?”
Of course, the length of time that prices fall is only one way to measure the “average” bear market. Most folks also want to know “how much lower can stocks go?”
Stocks have fallen just over 20% so far this year if you’re looking at the S&P 500. If you remember back to the 2008 financial crisis and the dot-com bust, the 2008 bear market knocked a full 56.8% off the S&P 500, while the 2000-2002 bear market put it down 49.1%. The tech heavy Nasdaq 100 index in 2000-2002 lost much more at negative 83%. That said, the average decline of all bear markets since 1950 is negative 29.8% for the S&P 500.
If you think this bear market will be “average” we only have another 8% to 10% of further declines ahead. If you think this bear market will join the “mother of all bear markets” club, the S&P 500 could shed another 30% and the Nasdaq could drop another 50%.
Another question one would ask is how long until we’re back up to the January highs?
Here, too, is where prior bear markets have shown an unhelpful wide range of outcomes. For instance, bear markets in 1980, 1990 and 2020 required just three, four, and five months, respectively, to recover all their bear market losses.
On the other hand, the 2008 bear market required 49 months to get even. The 2000-2002 bear market took 56 months. And the 1972 bear market recovery lasted a full 69 months which is nearly six years. All the bear markets since 1950 have required an average of 23.5 months. That metric is practically useless.
So, in these situations I always refer the my favorite social scientist Yogi Berra, who said, “It’s tough to make predictions, especially about the future”.
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