Stock investors have a lot of grief to do before the bear market takes a last breath.
According to the five stages of bear market grief, which I covered in mid-May, we are currently in the third stage. This leaves the fourth and fifth stages to suffer; Unfortunately, this is the most painful.
Judging where the stock market is in this five-stage process is not an exact science. Investors may be more ahead or behind. In mid-May, the existence of a bear market could still be denied, for example, since the S&P 500 SPX,
It has not yet fallen 20% from its all-time high.
Most investors have passed the first and second stages. It’s been six weeks since the S&P 500 met the bear market benchmark and investors’ focus has shifted to survival mode. This brings us to the third stage, when (as I wrote in mid-May), “investors are redirecting their energies to see if they can maintain their lifestyles despite portfolio declines; retirees are reorganizing their financial plans to see how they can avoid getting out of hand.”
looking at a A recent tweet from Ryan DetrickChief Market Strategist at the Carson Group. He pointed out that the stock exchange fully recovered since 1982 from the bear market within five months or less if the losses were less than 30%. With the S&P 500 at its mid-June low 24% below its all-time high, this statistic looks like good news — suggesting stocks could return to all-time highs by the end of the year.
In other words, this bear market is not so bad – as long as its loss does not exceed 30%. This is the classic “bargaining” perspective. As Kübler-Ross pointed out, in the bargaining stage we try to regain control of the situation by exploring an infinite number of “what if” and “if only” statements. However, trying to control a bear market is laughable. As I argued, this stage is actually nothing more than a defense against feeling pain.
There are no just psychological reasons why we shouldn’t take much solace from the rapid recovery from shallow bear markets in the past four decades – a sample that, by Dietrich’s calculations, contains only four examples. some questions:
Why choose 1982 as a cut? Unless there are sound theoretical or statistical reasons for doing so, this is a red flag when focusing only on a small subset of a larger database. A very different picture emerges of the bear market in September 1976 to March 1978, for example. During that, the S&P 500 lost 19%, but according to Dietrich, it took 17 months to recover that loss. If you factor in inflation, the recovery took longer: According to my calculations of S&P 500 earnings and inflation-adjusted return, it took the stock market nearly four years to pull itself out of the hole created by the 1976-78 bear market.
Shouldn’t the Fed be recognized to help the stock market recover quickly? Take the February-March 2020 bear market, for example, which far exceeded the 30% loss threshold. However, a full recovery has only taken five months, and the Fed’s extraordinary stimulus is worth the lion’s share of the credit. In fact, one could argue that the dominant factor behind this rapid recovery is the Federal Reserve, not the magnitude of the previous bear market loss. This possibility is especially important to consider now, given that far from easing monetary conditions, the Fed is removing the huge pot.
Bottom line? Historical data can be sliced and diced in many different ways to support predetermined conclusions. I remember Adlai Stevenson, the Democratic candidate for president of the United States in the 1952 and 1956 elections: mocking his opponents, he was said to have said, “This is the outcome upon which I shall base my facts.”
None of this means that the stock market cannot see a strong rally in the coming weeks. But if my analysis is on target, watch out for the last two stages of bear market grief – depression and acceptance – before a major new bull market begins.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to review. It can be accessed at [email protected]
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