Confusing Market Crashes & Bear Markets

Using monthly closing data, the “correction” in March was unusually swift but did not break the long-term bullish trend. Such suggests the bull market that began in 2009 is still intact as long as the monthly trend line holds.

I discussed this concept in the video below.


A Major Difference

There is a significant difference in investment outcomes between a correction within an ongoing uptrend and an actual “bear market.”

As is usually the case in articles pushing the “always bullish mantra,” it isn’t long before they pull out the 150-year chart to make their case.

“To put the COVID-19 downturn and stock market recovery into context, I updated the chart that shows the history of market crashes. The chart, which is based on a series of returns I created to form a hypothetical U.S. stock market index, displays U.S. real inflation-adjusted equity returns going back to 1871.

In this exhibit, the red cumulative wealth line shows the growth of the U.S. $1 (starting in 1870), with dividends reinvested, in the stock market index. In blue is the peak-to-recovery line, which traces the growth of $1 until the start of a decline, and then stays at that same peak value until the market recovers to that level. The gap created, shaded in the chart, shows the depth and length of each decline.”

Confusing Market Crashes Bear, #MacroView: Confusing Market Crashes & Bear Markets. (Part-1)

In this context, there certainly seems to be nothing of worry. As the article notes:

“This exhibit illustrates two important aspects of U.S. market return history:

  1. Despite numerous severe drops, the cumulative wealth line shows that $1 grows to $22,580 over this period of 150 years. In other words, staying in the market and weathering the storms have paid off for investors. (However, this could be a case of survivorship bias.)
  2. The range in shaded areas shows that some declines are worse than others—and how long each lasts is unpredictable.


Lost And Found

There is a sizable contingent of investors, and advisors, today who have never been through a real bear market(No, March was not it.) After a decade-long bull-market cycle fueled by Central Bank liquidity, it is understandable why mainstream analysis believes markets can only go higher. What concerns us is the rather cavalier attitude they take about the risk.

“Sure, a correction will eventually come, but that is just part of the deal.”

What gets lost during bull cycles, and found in the most brutal of fashions, is the devastation caused to financial wealth during a “mean reversion” process. (Or more commonly known as a “real bear market.”)

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