The Wall or The Wallop

“Bull markets really only end two ways: The Wall or The Wallop. The Wall is: They climb the “Wall of Worry” until there’s no more worry. Or The Wallop is: They get hit by a big, bad thing that nobody ever talked about before, which is at least a couple of trillion dollars in magnitude ... You look for those two, and otherwise, all the little stuff, you want to not pay too much attention to.”

–Ken Fisher, Fox Business Network Interview on 18/12/2014

Bear markets—by definition, fundamentally driven market drops of approximately 20% or more over an extended period—are a common fear for investors. Many investors worry that failing to recognise the next bear market on the horizon will severely hurt their chances of meeting their long-term financial goals. Unfortunately, while it’s easy to pinpoint a bear market in hindsight, identifying a bear market while it’s unfolding is much more difficult. The key is having the perspective to watch for and identify the right components and the discipline to prevent your emotions from getting in the way.

What are some signs you can look for to suggest a bear market might be forming? Fisher Investments believes there are just two ways bear markets start:

  • The Wall: A bull market—a sustained period, generally years, of rising equity prices—climbs the “Wall of Worry,” then runs out of steam amid widespread investor euphoria.
  • The Wallop: A negative surprise with the power to knock several trillion dollars off global Gross Domestic Product (GDP) hits an ongoing bull market.

The Wall

Most often bull markets end by running out of steam, best described by legendary investor Sir John Templeton: “Bull markets are born on pessimism, grow on scepticism, mature on optimism and die on euphoria.”

It is often said bull markets climb a “Wall of Worry,” with many widely held fears constituting the “bricks.” Examples from the most recent bull market that began in March 2009 include: the Russian-Ukrainian conflict; Ebola; the Brexit vote; North Korean missile tests and many more. Exhibit 3 shows the “Wall of Worry” this bull market overcame.

Exhibit 1: The Most Recent Bull Market Climbed the “Wall of Worry”

DSR-2863 Fig1

Source: FactSet, as of 7/6/2017. MSCI World Total Return Index Level (Net) from 12/31/2008 – 6/30/2017. Presented in US dollars. Currency fluctuations between the US dollar and Canadian dollar may result in higher or lower investment returns.

As a bull market matures, more and more fears are dispelled and newly confident investors tend to buy into stocks. When all worries wane, the absence of fear suggests you are at the Wall’s euphoric top. At that stage of a bull market, investors think the stock market will rise upward forever—“It’s different this time.” Once investor sentiment reaches euphoria, reality can’t keep up with sky-high expectations and the bull market runs out of steam. This is the traditional way bear markets begin and we believe it generally follows this formula:


The bear market starts when corporate and economic fundamentals are overall trending downward, but investors are caught up in euphoria—they either dismiss weakness or don’t notice it at all. They remain bullish and continue investing more money into the stock market, looking for profits.

The Wallop

Sometimes a bull hits an unexpected, immovable object big enough to knock a few percentage points off global GDP—and this alone can be enough to start a bear market. What do we mean by “immovable object”? It’s a big, bad, unexpected negative that “wallops” an otherwise strong economy and bull market. In this case, the unexpected negative is itself enough to derail the bull market:


Be careful, though, or else you’ll think you see Wallops around every corner and find it difficult to be bullish. In our view, a potential Wallop must be big enough to knock a few trillion dollars off global GDP in order to qualify. Consider: In 2018, we believed a Wallop needed to be bigger than $5.1 trillion to cause a global recession—that is, to affect financial markets globally and cause GDP to fall relative to 2017. (Exhibit 2)

Exhibit 2: Scaling a Wallop


Source: International Monetary Fund (IMF) Gross Domestic Product forecast (USD, current prices) as of October 2017. 2018 estimate based on the IMF’s October 2017 World Economic Outlook global GDP growth projection of 6.4%. Presented in US dollars.

Let’s take the Global Financial Crisis of 2008 – 2009 as an example: That was a bear market caused, in our view, by an ongoing bull market hitting an immovable object that brought it to a premature end—namely, the US FAS 157* (mark-to-market accounting) combined with the US government’s chaotic response to the financial crisis. This combination turned what otherwise might have been a correction—a short, sentiment-driven drop of 10 – 20% in the stock market that generally quickly recovers—into a full-blown bear market. Global GDP fell by more than $3 trillion—over 5%.** In our view, FAS 157 and the government’s unpredictable actions Walloped the bull market.

Finally, the Wallop can sometimes coincide with the Wall—if a bull market that happens to be at the top of the “Wall of Worry” is Walloped:


*FAS 157 was an accounting rule dictating that even illiquid assets would be valued at the price at which they would be sold if they had to be sold immediately (also known as “mark-to- market” accounting). This price was often the last sale price of a comparable asset. When it came to non-public, rarely traded assets with no regular market pricing, the last sale price could be outdated or far removed from current values. Or, the asset could be intended to be held to maturity, in which case the current market price was irrelevant to its ultimate value as the current market price would not be realised unless the holder was forced to sell immediately. In the early months of the bear market, FAS 157 made financial institutions susceptible if the markets for their illiquid, non-publicly traded holdings experienced negative volatility.

**Source: FactSet, as of 10/12/2015. World GDP from 12/31/2008 – 12/31/2009 per World Bank data.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns.