Friday, January 15, 2016

A bear market in stocks will be over before you know it

The S&P 500’s decline since last June already is more than half the length of an average bear market

CHAPEL HILL, N.C. (MarketWatch) — Bear markets don’t have to be as scary as you think.
That’s because, by the time you know for sure that you’re in one, there are decent odds that it’s close to being over.
This is important to keep in mind, not only because bear markets are an inevitable feature of the market landscape. It’s especially timely today, since some market averages (the Russell 2000 RUT, -1.84% for example) are already in bear market territory — as defined by a decline of at least 20% — even though the broader market averages are still above that threshold.
TimeRussell 2000 IndexMar 15May 15Jul 15Sep 15Nov 15Jan 16
Take the stock market’s recent decline, which began last June 23, the day that market benchmarks such as the S&P 500 SPX, -1.74%  hit their all-time high. That was 206 calendar days ago, which — as you can see from the chart above — is more than half the length of the average bear market of the past century. (I was able to calculate this average courtesy of a bear-market calendar maintained by Ned Davis Research, which counts 35 bear markets since 1900; their average length is 403 days.)
Of course, we’re not yet in a bear market. If, and when, the S&P 500 drops to 20% below the June high, even more time will have transpired.
This is precisely what happened in 2011, the year of the last bear market in the U.S. The early-October day when the S&P 500 fell to 20% below its late-April high turned out to be the day that bear market breathed its last gasp.
Not all bear markets work out this neatly, needless to say. But, not infrequently, a bear-market declaration often amounts to little more than closing the barn door after the horses have left.
We should all be asking: What were Wall Street’s latter-day bears saying last June, when the market was at an all-time high?
The answer is that bears were few and far between. On the contrary, bullishness was at close to extreme levels.
None of this is to minimize the pain and suffering caused by bear-market losses. But there should be at least some solace in knowing that, even if it is eventually determined that a bear market began last June, if it’s no worse than average it’s already more than half over.

No comments:

Post a Comment