For 35 years I’ve written of the capital markets as TGH—The Great Humiliator. It wants to humiliate me, you and as many people as possible for as much money as possible, for as long as possible. It always does, has and never gives up. Your goal is to engage The Great Humiliator while not letting it humiliate you, or not humiliate you too badly. Today its best tactic is scaring you away from the coming rebound. Don’t let it.
This stock market downturn is flirting with the -20% threshold commonly separating corrections from bear markets. More declines could come—maybe a lot, if it is a full-fledged bear market. That is the bad news. The good news: If this is a correction, it is a very long one—so the end is relatively close by. But it’s similar if a bear market. Their back halves in duration are very steep but also very brief. Once halfway down in magnitude, it’s not long, a few months, until the rebound. The lone exception: 1929–1932, and nothing about today is like then.
We will be beyond this swoon soon. The exact bottom is 100% unpredictable—except by fools. Don’t avoid stocks—not if you need them to reach your long-term financial goals. The rebound is always, always, always bigger. Volatility is always scary. But it isn’t actually very risky, thinking a year and longer into the future. That is what counts now, not the next few weeks or even months.
The distinction between -18% and -22%, or thereabouts, is obviously mostly semantics and weeks—and maybe just days--although headlines will and are calling even anything briefly touching 20% down a bear market. Doing that helps TGH with its goal because it’s scary. The distinction between -18% and 35% is that of between a full-fledged correction and a full-fledged bear market—yet it’s still just a few months. Missing a huge post-downturn rally waiting for “clarity” is anything but.
Yes, ubiquitous negativity may seem to signal endless agony looming. But every bear market and correction does that. Always. Then, months after, you forget. Always. Today it feels true—especially after March’s rally fizzled. Russia’s horrid Ukraine invasion, inflation phobia, FED phobia, Biden build back babble plus Trump-loutus-ness, and China’s lockdowns—they all combine to sap spirits.
But April and May’s downdraft seems a classic example of TGH hard at work. With scary stories threatening global recession but lacking the power to cause one, TGH tricks people into selling after swift declines—and then avoiding markets until “normalcy” returns. But big downturns always reverse well before sentiment shifts, always while things look most terrible, making that buy-back-in hugely risky—especially when unseen positives percolate, like those my previous column highlighted.
This decline has been fast, furious and painful, atypical of bear markets’ beginnings—even 1929 – 1932’s doozy. Outside 2020’s lockdown-induced plunge—which I’ve explained acted like an oversized correction before, during and after—historically bear markets roll over gradually. They fall gently enough early on not to scare people out suddenly and, in fact, luring more buyers in, legendarily the last “greater fools.” Hence the “2% Rule”: Early bear market declines are usually irregular but average about -2% per month or less. Only later do sharper downdrafts hit.
This drop has been nothing like that. Since its January 3 high, the S&P 500 has fallen over -4% per month. That is like corrections’ typical fast falls, which spook investors and quickly pre-price dour expectations. But bear market or correction—from here the distinction makes little difference relative to time and what is ahead a year or two out.
Consider sentiment. Fund manager cash allocations are at two-decade highs, per Bank of America’s May survey, amid record-high economic pessimism. The American Association of Individual Investors latest weekly survey shows bears almost double bulls. This dour sentiment builds the tools serving TGH while pre-pricing worst and first fears into stocks. That doesn’t mean declines are done. Short-term swings defy prediction. 2% is what I’ve always called, any Tuesday. 6% is just a weak week. The reverse of those occur similarly. But downside magnitude alone doesn’t determine bear markets. True, drawn-out bear markets possess both size, duration and a particular fundamental cause—which I believe to be lacking today.
What I believe is happening now, knowing I could be wrong and often am, is that we rarely have so many things to fret about all at once. And humans have a hard time getting our heads around so many things in one thought process. It feels a bit like getting swarmed by bees. Endless stinging. No one sting insurmountable but repeatedly and annoyingly and seemingly endlessly. Normal corrections usually have one or two big scary stories. Here I can count at least seven. None seem enough along or together, in my analysis, to get us to real recession…but, again, maybe I’m wrong.
Bear markets usually have one big driver combined with prior euphoric sentiment. I don’t think we ever got that euphoric sentiment and I’m reinforced in that thinking by the fact that most people did think it was euphoric. When it is really euphoric few think it is. And I can’t, for the life me, see one big driver to this period’s downside.
Finally, I note in looking at what I think is misunderstood now, folks see this as a shift from growth stocks leading the market to value stocks leading. That is very wrong if seen correctly. On big down days, value does better consistently. But on big up days growth leads and by a lot, consistently Because 2020 has been mostly down from January 4th, to most it feels like value has taken over the lead from growth. But when that big rebound comes, now or months from now, you have to ask yourself: Will markets start acting differently so on big up days value leads? No evidence of that anywhere. Zip. So when growth leads in the rebound, all those who shifted to value will have been TGHed.
Whatever you call this setback, history documents rapid declines—whether steep corrections or bear markets that don’t follow the 2% rule—yield to spring-loaded rebounds. Since good data start in 1925, the 16 S&P 500 corrections exceeding 5 months or -15% declines have a median duration of 5.7 months. But the recovery to pre-correction highs took just 3.9 months. Median returns 6 and 12 months off these large corrections’ lows are 24.9% and 32.0%, respectively.
The two speedy bear markets bucking the 2% Rule offer a similar lesson: Six months after 1987’s and 2020’s lows, stocks were 19.0% and 44.7% higher, respectively. Big, fast drops—big, fast rebounds. Stock categories hit hardest usually bounce biggest. Right now media and pundits urge you to own categories that have gone down least. That’s basackwards from Sunday to Saturday, all year long. Don’t let TGH scare you into missing out on the rebound or the categories that bounce the most.
What would make me turn bearish now? A big new negative that is broadly overlooked—that one big negative driver so common in bear markets but so far unseen—hence not factored into pricing. But I see just the opposite: near universal fixation on a fog of multiple heavily publicized lesser negatives shrouding stealthy positives.
Did you know that while inventory-driven wonkiness pushed Q1 US GDP lower, pure private sector demand—consumer spending plus investment in non-residential structures, equipment, intellectual property and housing—accelerated to 3.1%? Or that oil and gas well drilling surged 3.2% m/m in April, as US producers defied worries they wouldn’t boost production?
Or that March and April surveys taken after Russia’s Ukraine invasion—show the EU manufacturers boosting investment now dwarfed those cutting by 24 percentage points? My guess: You probably haven’t heard any of that. Sour sentiment is drowning a more nuanced reality. That drowning is super-bullish. It is what you don’t see that TGH uses to get its leverage over you. It is future surprise that always determines future pricing.
Big corrections and bear markets alike prey to “first-and-worst” catastrophic fears, convincing investors temporary headwinds are insurmountable. Fighting that takes fortitude. Though fearful emotions run hot and high now, stories of endless doom are false. There won’t be an all-clear sign heralding the downdraft’s end. But the ensuing recovery likely proves swift. I don’t know exactly when, but sooner than almost anyone thinks. So don’t let TGH fool you into doing its bidding—doing something stupid like selling out. This is a time for fortitude. Position now for the coming reversal.
