How to Spot a Big Bear Market
Ken Fisher distinguishes between short-term corrections and sustained bear markets, explaining that while both involve significant declines, true bear markets that matter are longer-term events typically accompanied by recessions and driven by big scary stories that markets haven't yet recognized. He argues that short, sharp drops like COVID or 1987, while technically bear markets, are too fast to time successfully.
Summary
Ken Fisher begins by defining the traditional distinctions between corrections (10-20% declines that are short and sharp) and bear markets (declines greater than 20% that are deep and long). He notes that these percentage thresholds are somewhat arbitrary, as the difference between 19% and 21% down can be mere intraday volatility. Fisher provides examples of short, sharp bear markets like COVID and 1987, which despite being brief lasted only weeks, are still classified as bear markets due to exceeding the 20% threshold. He argues that these rapid drops are too treacherous to time successfully regardless of their depth. Fisher then describes the characteristics of longer-term bear markets that accompany recessions, explaining they typically start gently rather than sharply, with the first two-thirds of the time period constituting only one-third of the total percentage drop, while the final third of the time period accounts for two-thirds of the decline. He introduces his rule of waiting three months before considering something a functional bear market, then looking for a 'big bad story' that nobody is discussing yet, as opposed to scary stories already priced into the market. Using 2022 as an example, he describes a bear market that lasted most of the year, declined just over 22%, but had no accompanying recession. Fisher emphasizes that legendary bear markets worth avoiding are driven by undiscussed problems involving trillions of dollars in unpriced bad news, distinguishing them from technical bear markets that are short-lived without recessions.
Key Insights
- Fisher argues that the 10% and 20% thresholds used to define corrections and bear markets are arbitrary lines in the sand, with the difference between 19% and 21% down sometimes being just intraday volatility
- Fisher claims that legendary bear markets accompanying recessions follow a specific pattern where the first two-thirds of the time period constitutes only one-third of the percentage drop, while the back one-third of the time accounts for two-thirds of the decline
- Fisher establishes a rule to never consider something a functional bear market unless you can look back three months and see higher prices in broad indexes, which he says saves investors from getting head-faked too many times
- Fisher contends that significant bear markets are driven by big scary stories that nobody is talking about yet, rather than the scary stories already being discussed, because those are already priced into stocks
- Fisher argues that to identify a major bear market worth avoiding, investors should look for undiscussed problems involving at least a few trillion dollars of bad news that isn't already priced into the market
Topics
Transcript
[0:05] So, one of the perennial questions that is pertinent to almost everyone that worries about where we are in the market at a point in time or all points in time, is how do you tell the difference between a short, temporary decline, like a correction, or a sustained bear market? Now, before we go there, let's just step backward for a second and kind of define what those two terms mean. [0:36] So, normally in parlance, which I'll come back to an exception on in a moment, a bear market is thought of as a decline bigger than 20% in the broad market averages. Most typically thought of as the S&P 500. But could similarly be thought of…
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