27 Mar Bear in Mind
With the market off to a rough start this year, there have been endless headlines around the state of the current market and where we might be heading. Volatility has spiked, and negative market sentiment is in focus. This has brought many bears out of hibernation; growling that we are finally reaching the inflection point after years of quantitative easing and accommodative monetary policies. The doom and gloomers have had a field day with claims that this is 2008 all over again.
Whether the bears are right or wrong is not the focus of this newsletter. We want to highlight the jargon that you have come across in your reading or on TV. The terms may sound very similar, but you were not sure in the difference of the meaning. We want to clarify the difference to these keywords that are circulating in today’s media so that you can stay informed and have a better understanding of what they imply.
Since the market bottomed in 2009, we have been in a “bull market” with a few pauses along the way. A bull market is defined as a market condition in which prices of securities or group of securities are rising or are expected to rise for an extended period of time. The term is associated with how a bull thrusts it’s horns up into the air when charging an opponent. Historically notable bull markets are the current 30+ year bull market in bonds as ten-year yields fell from +15% to around 2% today; and the bull market of the 90’s that was fueled by technology advancement such as the internet and personal computers.
The opposite is a “bear market.” A bear market is a market condition in which prices of securities or group of securities are falling. There is usually widespread pessimism that causes negative sentiment to be self-sustaining. Technically, a downturn of 20% or more from previous highs in multiple broad market indexes, such as the DJIA or the S&P 500 over at least a two-month period is considered an entry into a bear market. The term is associated with how a bear swats down with its paws when facing an opponent. Recently we have entered a bear market in multiple asset classes. By mid-February 2016, about 31% of the stocks in the S&P 500 were down 30% or more from their 52-week highs according to thestreet.com.
You may have heard the word “secular” before each one of the previous terms. The addition of secular denotes that particular market over an extended period of time. A secular market will have an overlying trend that includes both bear and bull markets. For example, a secular bear market will have bull market periods within it, but it will not reverse the overlying trend of downward asset values. We are currently in a secular bull market. We have had period of downturns along the way, but the overall trajectory has been up.
Now that we are facing bouts of significant volatility, many investors are wondering is this just a correction or the beginning of the end and we are heading into a recession. For most, this has just been a needed and overdue correction. A correction is defined as a negative reversal in prices of at least 10% in a security or group of securities, index, or commodity. Corrections are healthy for the market and give an opportunity for markets to shake out the speculators and reprice risk in the market. Despite the fact that we would all love the market to constantly go up, corrections are needed for the long term sustainability. Corrections prevent asset bubbles from causing contagion – spreading market changes or disturbances from one market to others.
After 7 years of the current bull market and the recent downturn to the start of the year, fears of a pending recession have been escalating. Historical data suggests recessions occur, on average, every 6-8 years which has fueled these fears. A recession is a period of temporary economic decline during which economic activity is reduced. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s GDP. Most recessions have seen the S&P 500 fall at least 20%. If you include the 19.9% drop during the 1990-91 recession, this has happened in 10 of the last 14 past recessions. The difficult part of a recession is that we do not know we are in one until it is already established.
Bull, Bear, recession, or correction; at the end of the day it is about time.
A twist with today’s environment is the unprecedented effect low oil prices have had on inflation levels. There is now fear of global deflation as central banks struggle to reach inflation targets despite the amount and duration of accommodative monetary policies. Deflation is defined as a decrease in the general price level of goods and services. Deflation occurs when the inflation rate falls below 0%. Although there has never been a recession caused by low oil prices, low oil prices together with lower demand from a slowing China have some people calling for a deflationary recession. A type of double whammy where lower prices are also accompanied with the characteristics of a typical recession. However, on the bright side, low oil prices enable the global consumer to be very resilient, which could insulate a recession’s severity and duration.
Bull, Bear, recession, or correction; at the end of the day it is about time. Your investment time horizon and the ability to stay in the market is what matters. Markets fluctuate and go through cycles. As humans we always try to “fix” whatever is not working. We are reactive. We get sick, we go to the doctor. If our business is lagging, we try to change things up. Having a plan and sticking to it, despite the headline noise, is often the best action.