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

Bear markets—by definition, fundamentally driven market drops of approximately 20% or more over an extended period—are a common fear for investors. It’s no surprise many investors spend time trying to identify anything likely to cause a bear market, as they worry failing to recognize the next downturn 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 in advance is much more difficult. The key is having the perspective to watch for and identify the right components, and then have the discipline to prevent your emotions from causing you to make poor decisions.

What are some common causes of bear markets that suggest one might be forming? We believe there are just two ways bear markets start:

1.)    The Wall: A bull market climbs the “Wall of Worry,” then runs out of steam amid widespread investor euphoria.

2.)    The Wallop: A negative surprise with the power to knock several trillion dollars off global 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 skepticism, 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 2009 – 2020 bull market 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 climbed. Each of these events worried investors, but did not have the size or surprise power to cause a bear market, and fundamentals at the time supported future growth—allowing the bull market to continue climbing.

Exhibit 3: The "Wall of Worry"


Source: FactSet, as of 7/6/2017. MSCI World Total Return Index Level (Net) from 12/31/2008 – 6/30/2017.

Typically, though, 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.” A great example of this is the start of the 2000 bear. At that time, tech-crazed investors believed valuations of weak companies with no proven revenue, like, deserved exorbitant valuations. 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 it follows this formula:


A bear market is usually caused by corporate and economic fundamentals 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 cause 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.

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, FAS 157* (mark-to-market accounting) combined with the government’s chaotic response to the financial crisis. This combination turned what otherwise might have been a correction 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.

The Wallop may 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—such as mortgage-backed, collateralized debt obligations and credit default swaps—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. 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.

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