What does a Bear Market look like?
Lance on Feb 11 2008 at 10:42 am | Filed under: Great Investors, Humor, Risk, Valuation, economy
John Hussman is always worth a read. I like this from his letter this morning:
As I wrote in April 2000, bear market psychology typically evolves something like this:
“This is my retirement money. I can’t afford to be out of the market anymore!”
“I don’t care about the price, just get me in!!”
“It’s a healthy correction”
“See, it’s already coming back, better buy more before the new highs”
“Alright, a retest. Add to the position - buy the dip”
“What a great move! Am I a genius or what?”
“Uh oh, another selloff. Well, we’re probably close to a bottom”
“New low? What’s going on?!!”
“Alright, it’s too late to sell here, I’ll get out on the next rally”
“Hey!! It’s coming back. Glad that’s over!”
“Another new low. But how much lower can it go?”
“No, really, how much lower can it go?”
“Good Grief! How much lower can it go?!?”
“There’s no way I’ll ever make this back!”
“This is my retirement money. I can’t afford to be in the market anymore!”
“I don’t care about the price, just get me out!!”
Heh, well I don’t think I see that kind of attitude yet. He makes some other points which I have discussed before, but bear repeating:
But as I’ve frequently noted, most bear markets are not simply one-way movements. Bear markets typically comprise two, three or more separate 10-20% declines, punctuated by fast, furious rallies. It’s easy to forget that the 2000-2002 bear included three bear market advances of 20% from intra-day low to intra-day high, as well as numerous smaller advances, all of which were surrendered in subsequent plunges to new lows.
What about earnings growth? I don’t think we will see much this year, but even if I am wrong I would suggest not getting too comfortable:
At the January 1973 market peak, earnings had hit a new high, and stock prices were selling at a P/E multiple of 20, which is extreme on the basis of record earnings. Over the next 2 years, corporate earnings grew by 56%, yet the market fell by half. The 73-74 bear market teaches that stock prices can decline from rich valuations even if earnings grow dramatically:
How that worked out is gone into in detail and with a bit of sass. As I said, well worth reading. Market history does not prove what will happen in the future, but it does prove that some beliefs cannot be counted upon.
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