Good Intentions Can Cause Bad Bear Markets
Bear markets are primarily caused by three factors: government actions taken with good intentions that backfire and trigger recessions, excess sentiment that creates recessionless bear markets, or a combination of both. The speaker illustrates how regulatory policies like mark-to-market accounting in 2008 and pandemic lockdowns exemplify well-intentioned government interventions that produced negative economic outcomes.
Summary
Ken Fisher outlines a framework for understanding bear market causes, categorizing them into three primary mechanisms. The first and most common cause is government or quasi-governmental actions (like central banks and accounting standards bodies) undertaken with good intentions but producing negative economic consequences. He uses the 2007-2009 financial crisis as a detailed example, explaining how FASB's mark-to-market accounting rules forced banks to write down trillions in loans, weakening their balance sheets and triggering a credit crunch that cascaded into economic recession. He also references COVID-era lockdowns as another example of well-intentioned policies that ultimately damaged the economy despite goals of saving lives.
The second bear market category involves sentiment-driven declines without accompanying recessions. The 2022 bear market exemplifies this—despite widespread recession expectations that never materialized, negative sentiment alone drove market decline. Fisher notes that businesses and consumers engaged in precautionary "house cleaning" that averted recession but couldn't prevent the sentiment-driven downturn. He identifies excess sentiment indicators like enthusiasm around IPOs, citing SpaceX's initial public offering as an example of sentiment excess, though he notes that its subsequent modest performance has helped temper broader market excitement.
The third and most severe bear market scenario combines excess sentiment with a major dislocating event or poor government policy decision, creating both sentiment collapse and recession simultaneously. Fisher emphasizes that across all scenarios, government actions—whether regulatory, monetary, or lockdown-related—remain the predominant bear market catalyst, often driven by misguided intentions rather than malice.
Key Insights
- Mark-to-market accounting rules coordinated by FASB forced banks to write down trillions of dollars in loans, weakened their regulatory balance sheets, and created a credit crunch that triggered the 2007-2009 recession
- Bear markets can occur without accompanying recessions when sentiment deteriorates—as happened in 2022 when anticipated recession never materialized but preventive business actions and negative sentiment still drove market decline
- Excess sentiment, particularly indicated by surging IPO enthusiasm and excitement, can independently cause recessionless bear markets as sentiment eventually cools off
- Government lockdowns during COVID, though intended to save lives, actually caused economic decline rather than preventing it, exemplifying good-intentioned policies with negative effects
- The most severe bear markets result from the combination of excess expectations and major government policy mistakes or dislocations that simultaneously trigger both sentiment collapse and recession
Topics
Transcript
[0:04] What are the most common things that cause a bear market? I'm going to make this real simple. The most common things that cause a bear market, not the only things, but the most common things, are something big and bad, done with good intention by governments, often in coordination, that they think is going to improve things, that actually make things worse. If we go back to the, [0:34] now we're talking about a recession and bear market, I want to come back and talk about, in a moment, a bear market without a recession. But if you think of a bear market with an accompanying economic recession, that's the main single cause. If you go back, for…
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