Was that a bear market rally then?
It’s common for markets to rip higher during downtrends, is that what just happened?
Published
September 4, 2024
Ask any boomer investor and they will tell you that equities haven’t experienced a proper bear market since the global financial crisis (GFC) of 2008-9. The same crowd might even recall the post-dot.com three years of falling stock prices as an example of “real pain” this generation is yet to feel.
Investing pain is relative of course, and the pandemic certainly left plenty of battle scars. Not to mention the dramatic sell off in some technology companies over the last six months.
But the two big bear markets referred to by the old-timers did differ in one important way. They went on for a lot longer than any down market has since.
It’s true that longer lasting sell-offs can feel more painful. The pandemic collapse was dramatic, but in the context of time and markets, blink and you’d have missed it.
Comparisons to past bear markets leave investors wondering what lies ahead and whether we can learn anything from history. If we have entered a longer lasting downtrend what might it look like?
When markets get it into their heads that they fancy a sustained downturn, you’d think they’d have the decency to tell us all first.
Unfortunately, they’re a bit more Machiavellian than that. Like a cat with a startled mouse, they let us develop a bit of hope periodically, only to snuff that out soon after.
Of course, we never can tell whether that’s the case or the market has genuinely found the bottom until a long time after.
The point though, is that rallies are a feature of longer-term downtrends. They can be powerful and often see stock prices moving up hard and fast, luring investors into a false sense of security along the way.
During the GFC there were a number of market rallies that punctuated the sell-off. Some of these led to a premature declaration of the end to the bear market, only for stocks to resume their downward trajectory.
The same was true during the 2000s sell-off. At one point towards the end of 2001 the S&P 500 rallied for six months. Yet the bear market didn’t officially end until March 2003, over a year later.
So it’s possible that we are in the early stages of a longer-term downtrend that will be interrupted by short, sharp rallies like the one we have just seen.
But before you reach for the sell button...
All bear markets end. At some point stock prices become too cheap to ignore, all the bad news gets priced in and buyers flock back in droves. This normally happens before the negative headlines actually stopped hitting.
Warrant Buffett said in 2008, when he was buying American stocks (a long time before they bottomed) “if you wait for the robins, spring will be over.”
In other words, it’s impossible to predict the bottom, and bear market buyers always tend to be too early.
But in the long arc of time, even the longest of bear markets tend to be overpowered by much longer periods of rising stock prices. So being on the lookout for bargains is always advisable.
We’re only four months into 2022 and we’ve already had a hefty fall, recovery and fall again. It’s possible that we continue gyrating wildly and ultimately end the year where we started.
For long-term investors bear markets can provide opportunities to pick up great investments at bargain prices. The key is to stay on the front foot and not get too wrapped up in past performance.
After all, it’s rarely a guide for future returns.
Good investors know timing the market is a mug’s game and trying to spot the bottom, as well as whether it’s going to turn again soon, is utterly impossible. We are much better off investing regularly in the firms we have decided offer long-term value, and looking out for any bargains that suddenly offer a good entry point.
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When you invest, your capital is at risk. The value of your portfolio can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future results.
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