How to Spot a Big Bear Market

Transcript

Ken Fisher:

So, one of the perennial questions that is pertinent to almost everyone that worries about where we are in the market at a point in time or all points in time, is how do you tell the difference between a short, temporary decline, like a correction, or a sustained bear market? Now, before we go there, let's just step backward for a second and kind of define what those two terms mean. So, normally in parlance, which I'll come back to an exceptional in a moment, a bear market is thought of as a decline bigger than 20% in the broad market averages. Most typically thought of as the S&P 500. But could similarly be thought of as one of the indexes that I would prefer, like the Morgan Stanley All World or Morgan Stanley World that covers the spectrum of the globe, including the United States, on a similar cap weighted basis to the S&P 500. It's supposed to decline over a fairly long period, not just more than 20, but deep and long. The correction is thought of as something that's short and sharp. Got a scary story. Is a drop bigger than 10% in those same kind of averages, but not bigger than 20%.

Now, just step back for a moment and think about it. Those numbers 10 and 20 are somewhat arbitrary lines in the sand. So, intuitively you know that the difference between 19 down and 21 down is sometimes just intraday volatility. And therefore, not really indicative of something very fundamental. But I will tell you, that most usually, if it gets down below 20 at all, even if it's short and sharp, it'll later be thought of as a bear market. So, the terms are a little confusing. Let me give you a couple of examples. The break of the market for Covid was exceptionally sharp, exceptionally short, only a matter of weeks, and just a few at that, before you bottomed and were moving back up toward new highs. And yet it's always considered a bear market. 1987, another legendarily short, sharp break. Big like Covid was, but very short, like a correction, normally thought of as a bear market. So, I don't know that there's an easy way to distinguish those.

What I would say is if it's really short and sharp, it doesn't really matter how deep it is. Because if it's really short and sharp, and it bounces back really, really fast, trying to time that's going to be too treacherous to succeed at anyway, unless you got some kind of skills I don't know anybody having. And therefore, whether it's down 15, 19, 21 or 40% in that same very short time period is a matter of scary steep vertical drop, which can qualify as bear market but doesn't have duration. Typically those, and all the ones of those that I can think of in history, don't come with a recession. The telltale feature of a bear market that endures over a longer period of time is very different. It tends to start not sharply. It tends to roll early on and be gentle in its early decline.

A basic rule of bear markets that are accompanied by recession, that are big and steep and last a long time, like a couple of years, or even more than a year, is that the first two-thirds of the time of the entire bear market only constitutes about one-hird, about one-third of the percentage drop. The back one-third of the time of the life of that bear market typically constitutes about two-thirds of the drop. They start off more gently, and then they get steeper and steeper and steeper and steeper before they do a little bit of wiggling, bottom and go up. So, it is more likely that you're in a bear market if you've got that kind of a pattern. And there may be something then you can do about it. So, let me talk about that for a moment.

One of my basic rules is to never consider something a functional bear market, unless from where you are, you can look back in time at higher prices for broad indexes, three months earlier. This saves you from getting head faked way too many times. And then after three months, what you're looking for. Is there a big bad story that nobody's talking about? Because that's the telltale sign of what happens that takes that back two thirds down, that big scary story. So you wait a few months, like three, and then you start looking for that big scary story. Those kinds of bear markets are not driven by whatever scary story everybody's been talking about up to that point in time, because that stuff's already been priced into stocks. It's the scary story that hasn't been talked about yet. So, I know everything that I've said to you today in this video has got a little bit of, and I want to go back to a little bit of that, this and that Take 2022. You had a bear market that started early in the year and culminated September, October, depending on exactly when you're talking about, overseas or in America.

This was longer than most corrections. It was down just over 20%. If I remember right, which is not exact, but it was done down at the bottom, down 22%. Again, enough of a small decline that the part that distinguishes it as more than 20 could easily be interday noise or a couple of days noise. And there was no recession. That notion of a correction or a technical bear market that's just over 20 usually doesn't have a recession in it. The thing to look for, for the big, enduring, deep, long bear market that's worth trying to avoid is that big bad thing that people aren't talking about that allows whatever has started to go wrong to cascade down heavily. If everybody's talking about whatever it is, look for something they're not talking about. It's got to be big. It's got to involve in the scale of global GDP today, at least a few trillion dollars of bad that isn't already priced.

That's the thing to look for. That's the key distinction between something that might get technically called a bear market, but is short, doesn't have a recession and isn't that deep for very long at all. Maybe deep, steeply for a relatively few days, but not like the bear markets of history that are the legendary ones. So, thank you for listening to me. I hope you found this useful in terms of what you could utilize moving forward. Hi, this is Ken Fisher. Subscribe to the Fisher Investments YouTube channel if you like what you've seen. Click the bell to be notified as soon as we publish new videos.