The Big Bear Attack! June 2022
Alexander Petrov, CIM
Senior Portfolio Manager & Wealth Advisor | Petrov Wealth Management Group at RBC Dominion Securities
As summer rolls around, we enter the winter of investing also known as a bear market.
A “bear market” is when a given market experiences a 20% decline or more from it's recent peak. We usually refer to declines of less than 20% as a “correction”. Another characteristic is they tend to be generalized declines that affect most, if not all of the sectors. The catalysts of these declines are always unique in their circumstances which always makes them feel like “This time it’s different”. It is important also to know that bear markets do not necessarily coincide with recessions. A recession is defined as two consecutive quarters of declining GDP growth. These are two distinct topics.
Here is something bear markets and recessions have in common: They are always confirmed looking back and they cannot reliably be forecasted ahead of time. Attempting to engage in forecasting makes for a fun conversation over a drink but cannot be the basis for an investment policy, as we will explore together.
Market Snapshot YTD (as at June 21st 2022)
(Data retrieved from Factset on June 21st at 12:25pm)
The catalyst of this bear market
The stock market has done tremendously well over the last couple of years. We had a brief 5-week bear market in March of 2020 during which the Dow Jones declined about 37%. If you recall, there was an unbelievable amount of panic in the market. Central banks acted quickly with monetary policy and hyper-low interest rates (perhaps to a fault). This brief bear market was quickly followed by a skyrocketing of the stock market in 2020 and 2021. Some investors got sidetracked from fundamentals and some companies valuations had been stretched far beyond what I would consider to be realistic. Meanwhile, the restrictive policies as well as other factors around the world have brewed supply chain issues in virtually every industry. As I wrote well over a year ago in my newsletter, inflation is an inevitable next step in the cycle when this amount of money has been printed, interest rates reduced to historical lows while also dealing with supply shortages.
The current catalyst to this bear market is persistent inflation and the fear that central banks will raise rates until we hit a recession. Raising interest rates works to reduce demand but this does not solve the supply problem and thus, it cannot be the only tool in the toolkit. From a policy viewpoint, governments may need to think about how to incentivize production because ultimately, productivity is the lifeblood of the economy.
We found this article written by Eric Lascelles, Chief Economist of RBC Global Asset Management which is a deep dive on current economic data.
Below is Eric’s overview for those who just want the talking points. If you want to go deeper into the data, then please read the full note in the link above.
Overview
This week’s note revisits several key themes, adding to what we know about high inflation, economic trends, the risk of recession, the path forward for central banks, supply chains and China. It also examines the particular vulnerability of the U.K. to stagflation and the recent plight of cryptocurrencies.
Positive developments include:
Negative developments include:
Are we headed for a recession? How can I stay optimistic if that is the case?
We may very well be in the midst of a recession already. I believe this is a likely scenario but again we will all find out at the same time while looking back. Raising rates may reduce inflation but it results in reduced demand (people spending less) and it does nothing to increase productivity. Here is a brief summary of the viewpoints of Ray Dalio, one of my favorite thinkers on the topic of the economic machine.
“In summary my main points are that 1) there isn’t anything that the Fed can do to fight inflation without creating economic weakness, 2) with debt assets and liabilities as high as they are and projected to increase due to the government deficit, and the Fed also selling government debt, it is likely that private credit growth will have to contract, weakening the economy, and 3) over the long run the Fed will most likely chart a middle course that will take the form of stagflation.” – Ray Dalio
“The only way to raise living standards over the long term is to raise productivity and central banks don’t do that. “ – Ray Dalio
The good news however is that the stock market is forward-looking as it appears to me that it is already pricing-in recession and stagflation risk right now. There is no telling when or where the bottom is (bottom-fishing is a foolish game) but the market is efficient at taking variables into account in the price on a forward-looking basis. For a multi-year investor, optimism is the only way of that thinking that squares with the facts, which is that the stock market is on a constantly-rising trend line with temporary corrections and bear markets in between. Those bear markets present excellent buying opportunities.
Generally, if the consensus is pessimism (like right now), then I become more optimistic and opportunistic. In the fearful part of the cycle, I would be telling you to stay away from the fear of the moment and have your opportunity radar on. If the consensus is optimism or euphoria, then I tend to become a bit more cautious. Those euphoric parts of the cycle are when I tell clients to stay away from the fads of the moment.
History of Bear Markets (S&P 500)
There have been a total of 28 bear markets since 1928. The average decline was -35.62% and the average length of time was 289 days. There is an average of 3.6 years between bear markets. (Source: seeking alpha)
Dates Decline Percentage Length in Days
9/7/1929 - 11/13/1929 -44.67% 67
4/10/1930 - 12/16/1930 -44.29% 250
2/24/1931 - 6/2/1931 -32.86% 98
6/27/1931 - 10/5/1931 -43.10% 100
11/9/1931 - 10/5/1931 -61.81% 205
9/7/1932 - 2/27/1933 -40.60% 173
7/18/1933 - 10/21/1933 -29.75% 95
2/6/1934 - 3/14/1935 -31.81% 401
3/6/1937 - 3/31/1938 -54.50% 390
11/9/1938 - 4/8/1939 -26.18% 150
10/25/1939 - 6/10/1940 -31.95% 229
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11/9/1940 - 4/28/1942 -34.47% 535
5/29/1946 - 5/17/1947 -28.78% 353
6/15/1948 - 6/13/1949 -20.57% 363
8/2/1956 - 10/22/1957 -21.63% 446
12/12/1961 - 6/26/1962 -27.97% 196
2/9/1966 - 10/7/1966 -22.18% 240
11/29/1968 - 5/26/1970 -36.06% 543
1/11/1973 - 10/3/1974 -48.20% 630
11/28/1980 - 8/12/1982 -27.11% 622
8/25/1987 - 12/4/1987 -33.51% 101
3/24/2000 - 9/21/2001 -36.77% 546
1/4/2022 - 10/9/2002 -33.75% 278
10/9/2007 - 11/20/2008 -51.93% 408
1/6/2009 - 3/9/2009 -27.62% 62
2/19/2020 - 3/23/2020 -33.92% 33
04/01/2022 - ? ? ?
Bulls Outrun Bears
It is easy to get discouraged when you see double-digit declines but history tells us that bulls outrun bears every time.
A reminder about “Timing the market” vs “Time IN the market”
The classic misconception we hear is “I will get out of the markets now while things are uncertain and I will get back in when things are looking more optimistic”. That sounds like it makes sense in theory but prices are lower when there is higher uncertainty and prices are higher when things look better. Acting on this thought means you would sell low and buy high - thereby creating the loss you were afraid of in the first place. That is the opposite of what you should do.
Attempting to time the market is a losing proposition. Don’t take my word for it, let’s look at some empirical evidence, courtesy of CI Global Asset Management.
There are two main points about this:
Let’s look at “A tale of three investors” by RBC Global Asset Management.
How do you survive a bear market?
Remain adequately diversified by geography, by sector and only own fundamentally sound businesses with limited exposure to each. If you are still accumulating assets, keep dollar-cost averaging into the investment portfolio. If you have a lump sum in cash, I also recommend dollar-cost averaging into the investment portfolio rather than deploying all of it at once. If you are retired, we would already have advised you to have 1-2 years worth of living expenses in cash as a “hump” you can live on while the skies clear. Remember that bear markets are unpleasant but they can’t hurt you unless you hurt yourself.
Investing is essentially a microcosm of life in general. Success comes to those who overcome adversity and remain optimistic when most people give up. Factually, investor behavior is the determining factor between success and failure – not bear markets.
Alexander Petrov
The Petrov Wealth Management Group
www.petrovwealth.com
alexander.petrov@rbc.com
PS. We take on a limited amount of new clients in a given year and we primarily work by referral. Let us know if there is someone you know who needs help during these volatile times.