Preparing For The Grizzly Bear

LewisBraham

Good article: https://etf.com/sections/etf-strategist-corner/preparing-grizzly-bear
Of particular interest is the subject of "teddy bears," which investors have gotten used to lately.

Intellectually, we know a bear is coming, but I don’t think people understand it emotionally. And people have gotten used to what Jason Zweig of the Wall Street Journal called “Teddy Bears.” These bears recovered very quickly.

Look at this chart:

Another quote:

Intellectually, we understand recency bias, and most of us know a bear can be fiercer and hang around much longer. Zweig noted U.S. bears have lasted nearly 20 years. And just recently, the Japanese stock market recovered from its 1989 high—that’s 30 years! If you think that can’t happen here, I suggest you rethink your position—and I’d do it sooner rather than later.

Here's Zweig's article referenced in this one: https://wsj.com/articles/what-happens-when-stocks-only-go-up-11619794810

davidrmoran

"Good"? A preposterous fright article seems more like it. Zero substance.

(And ... teddys include 2.5y and 1.5y dips?)

What would cause a protracted bear market? Fundamentals (overvalued) aside, if the market fell as he scarily suggests is possible but without giving reasons, the buying eventually (pretty soon) would be astonishing in its quickness, as quick as or quicker than the selling.

Q: Who here would use a financial advisor who told you with a straight face:

"... just recently, the Japanese stock market recovered from its 1989 high—that’s 30 years! If you think that can’t happen here, I suggest you rethink your position—and I’d do it sooner rather than later"

"Try to imagine what would happen if stocks lost 70% and stayed down for years. It might mean things like:
You cannot afford to send your kids and grandkids to college. In fact, you need to take back those college 529 accounts you set up for them.
You must sell that vacation house even though the market is quite depressed.
You must either sell your home or take out a reverse mortgage to have cash to live on.
You must figure out how to cut your monthly expenditures in half even though you say only 20% is discretionary. Maybe one of the kids will let you live with them?
Embrace the pain you would feel. Even if you didn’t need to cut things out, I’m pretty certain that you’d feel a lot of regret if you were heavily in stocks and lost more than half of your net worth."

" ... protect your financial independence from a bear market that doesn’t resemble the last three. "

... "I’m afraid of grizzly bears—they are fierce!"

Booga and boo!

Worthless. Is there a point? A plan? Ah: bond ETFs? Got it. Yeah, that'll work.

Maybe he just meant to say Don't use levered equity ETFs. That person he met in the lede made him lose his mind. I sure hope he did not get paid any folding money for writing this.

Crash

LOL.

hank

Probably none of us think about those real long-shot “black swan” events - be it a multi-year market collapse, our car being totaled on the interstate while we’re in it, or our home being destroyed. (Fortunately, the latter two can be insured against to a degree.) Such events are so rare and out of the normal that we really have trouble acknowledging the possibility or comprehending what one would be like.

I suspect that premonitions of these nightmarish, but exceedingly rare, events may explain why otherwise rational people buy 30-year T-Bonds paying under 2% at a time when equity and commodity indexes are going nuts. How else to explain it?

LewisBraham

Hey when I look at the trailing p-e of QQQ and it’s over 40 and the trailing p-e of IVV and it’s over 33 when the long-term average for stocks is about 15, it seems surreal to me. And this isn’t off trough earnings either. This is after massive amounts of stimulus when the tech sector, the dominant one in both indexes, did quite well. How much ammo does the Fed have left to prop things up if things go wrong? And if you read Zweig’s article—not a dummy by any means—he would argue that even the 08-09 bear was short by historical standards. I think it’s important to put things in perspective and I liked the fact the article showed how different asset classes performed well in different kinds of bears. That’s very important for investors to understand—what might work depending on the kind of bear we will have. Stocks could fall 50% from here and still not be at historical norms. And it’s an important question whether such a decline lasts a few months or several years. So, I’m not sure why the article is stupid.

From Zweig's piece:

With the exception of a 100-day rebound after an interim drop in early 2009, [the 2020 recovery is] the fastest-ever recovery to a prior peak. The S&P 500 has fallen at least 20%—the conventional definition of a bear market—26 times in the past nine decades, according to Dow Jones Market Data. Recoveries to previous highs have typically taken almost three years, often much longer.

davidrmoran

Your comment above has (not surprisingly) more intelligence and substance and less unhinged alarmism than the Roth guff.

At least until you get to the '50% fall' and 'important question' parts.

I did not say anything about Zweig.

The article is stupid because of what it says:

Try to imagine what would happen if stocks lost 70% and stayed down for years.

What useful or actionable comes from such imagining? To anyone?

And what would have been the conditions for such? Asteroid? Worse plague?

I’m pretty certain that you’d feel a lot of regret ...

Jeez louise.

I do recognize that anxiety-churning is a major motive for journalism and especially financial journalism. But Roth is juvenile even by today's standards of mega-fret-mongering.

LewisBraham

There is a lot of fear mongering about the economy and inflation for obvious reasons, but I don't see a lot about the stock market. I think Roth is right to get people to try to conceptualize the risks even if a little ham-handed. Here's Zweig on the subject of optimism:

In February 2020, before the pandemic had fully hit home, these [surveyed Vanguard] investors estimated the odds of such a bear market at an average of only 4%. By April, just after the S&P 500 had fallen by one third, their expectations that the market would plunge again in the coming year nearly doubled to 8%.

Those fears swiftly faded. By last December, investors in the Vanguard survey estimated the probability of another crash in the ensuing 12 months at only 5%. That was slightly lower than their average estimate during the three years before the pandemic.

It’s as if the speed of the recovery had erased the pain of the decline, or made a recurrence seem even more improbable. Just like that, a grizzly bear turned into what feels more like a teddy bear.

That complacency takes a toll—even among Vanguard investors, who tend to be cautious. These people often follow the philosophy of the firm’s late founder, Jack Bogle, who preached patience and repeatedly warned that stocks are risky. If anyone should come through the sharpest market decline in decades unperturbed, it’s the people in this survey—typically about 60 years old, with about $225,000 in Vanguard investments, roughly 70% in stocks.

Yet they didn’t all sit tight. One group in the survey stood out: those who went into early 2020 with the highest expectations for stock returns in the upcoming year. They ended up reducing their exposure to stocks much more sharply during the crash of February and March 2020 than those who had been expecting lower returns.

They also tended to turn around and buy back much of the stock they had just sold—but not until prices had already shot above the March lows.

Investors elsewhere seem to have concluded from the swiftness of the recovery that stocks aren’t risky at all. After last spring’s rebound, Dave Portnoy, a social-media celebrity, declared “Stocks only go up” so often that it began to seem like a magic incantation.

And, for the past year, just about every stock has gone up.

That’s largely because the Federal Reserve has backstopped markets by squashing interest rates toward zero and by buying more than $2.5 trillion in Treasury securities since February 2020, along with other massive interventions. Meanwhile, emergency government programs pumped trillions of dollars of stimulus into the economy.

As for useful actions, I can think of quite a few--save more, spend less being an obvious one. But there are others. Roth's story has a table I can't reproduce here for some reason of which asset classes did well in previous bear markets. It's worth thinking about which might do well in the next one. The I-bond thread already points to an interesting avenue for saving. Options funds if you can find the right one are interesting. Are Treasuries worth it, REITs, high quality value stocks with strong balance sheets? Gold bullion? Cash? Paying down your mortgage or refinancing it? Those are worthwhile discussions to have.

Observant1

davidrmoran said:

The article is stupid because of what it says:

Try to imagine what would happen if stocks lost 70% and stayed down for years.

What useful or actionable comes from such imagining? To anyone?

And what would have been the conditions for such? Asteroid? Worse plague?

The Nasdaq peaked at 5,048.62 on March 10, 2000.
From that point it generated a maximum cumulative loss of ~80% until October 2002.
I'm not aware of any major plagues or asteroid crashes during this period.
All that was needed for this to occur was a bit of irrational exuberance!
The Nasdaq did not climb back above 5,000 until March 2015.

davidrmoran

Ah, I guess he left out technology before stocks.

Yes, that was a bad 2.5y. And then a loong haul, sure. Good thing I was in the diversified TWEIX instead (Fundalarm recommendation, iirc).

Anyway, what is your takeaway from Roth? Avoid tech now? Does that seem wise?

What nonfear, meaning usable, strategic-action point do you read he is making? He says he is an FA, ffs.

>> The I-bond thread already points to an interesting avenue for saving. Options funds if you can find the right one are interesting. Are Treasuries worth it, REITs, high quality value stocks with strong balance sheets? Gold bullion? Cash? Paying down your mortgage or refinancing it?

Again, LB's own broad thoughts give more to chew than Roth's "good article" megaphone.

hank

“ There is a lot of fear mongering ….. Those are worthwhile discussions to have.”
Nicely put. Thanks for the detailed analysis @LewisBraham

I try to read as much of the popular financial press as I can - by no means a comprehensive amount. But what often surfaces in these analyses is: (1) Central banks (notably the Fed) do not want to tank the markets. (2) They do, however, want to curb speculation. Unfortunately, there’s emerged over the years a certain amount of conflict there. When they do attempt to tighten (slow speculation) the equity markets become turbulent and fall or threaten to fall. “Taper tantrum” is the phrase often used. (3) This conflict leads (it seems invariably) to stage #3 in which the central banks / Fed “cave” to the markets and loosen the reins again. Repeat the process. Market players understand the game.

So now after years (decades?) of monetary stimulus we sit at near 0 short term rates with the Fed still buying bonds (albeit at a reduced rate) and talking obliquely about needing to further stimulate until “full employment” is reached. (Have you tried having your home roofed or painted lately?) Meanwhile, the markets march merrily along, The question left unanswered is - What further can the Fed and central banks do to keep the magic market money wheel churning next time the economy and / or stock market begins to shudder? What happens to those elevated asset prices when the stimulus runs out and people begin to realize the tank is empty?

One pundit I follow expects that coming inflation will force the bond market to take control - irregardless of Fed policy. In other words, faced with growing losses of purchasing power bond investors will sell en mass, forcing rates higher and eventually toppling stocks. I don’t necessarily siubscribe to this view, But think it’s one (of many) worth considering.

Derf

@hank : That seems reasonable to me, but if I had to place a bet, I'd take other in this case.
Enjoy your weekend

hank

“Everybody Ought to be Rich” - by John J. Raskov

Article - Ladies Home Journal (1929)

“Mere saving is closely akin to the socialist policy of dividing and likewise runs up against the same objection that there is not enough around to save. The savings that count cannot be static. They must be going into the production of wealth. They may go in as debt and the managers of the wealth-making enterprises take all the profit over and above the interest paid. That has been the course recommended for saving and for the reasons that have been set out-the fallacy of conservative investment which is not conservative at all. The way to wealth is to get into the profit end of wealth production in this country.”


And this - “How Can We Tell if the Market is Overvalued?”

Article by Brad McMillan (2021)

“So, is the market crazy expensive? (For the record, this is how my son would put this question.) As I mentioned above, we have three ways to get to the answer. Based on history, the answer is yes. Based on current interest rates, the market looks reasonably priced—not cheap, but certainly within a reasonable range. Finally, based on market behavior, we can see rational pricing. As I see it, history does not seem to be the best guide to our answer, especially given the multidecade trend of rising valuations. On balance, the right answer seems to be that the market is reasonably priced.”

sma3

I think we all need to be aware of the potential catastrophe if we enter a prolonged bear market. People who are depending on their equity returns to live on will be hurt very very badly.

While the 1930s are probably not a useful comparison, as the Fed was nowhere to be seen, many of us lived through the 2000 to 2013 crash. While there was a "recovery" to a previous high by 5/29/2007, within five months things went south again, and did not recover until 2013.

Taking the two periods together, it was over 13 years of no returns. The PE fell from 35 to 8.

While the Fed is obviously more willing to intervene now, with rates at near zero, and the deficit enormous, there may be less they can do.

FD1000

Love "experts" predictions, see (link)

Example: In 05/2012 (article)

Question:You have become famous for your cyclically adjusted 10-year price/earnings ratio. What do the latest numbers say about future stock market returns?

Shiller: we found a correlation between that ratio and the next 10 years' return.
If you plug in today's P/E of about 22, it would be predicting something like an annualized 4% return after inflation.

FD: reality, the SP500 made 15+% average anually since that date and much better than countries with lower PE10.

==============

I would love if markets collapse because I would be out. I have been doing it for years and why my biggest loss from any top since 2018 was less than 1%. I made money every week in March of 2020.
How do I know? VIX is one of my indicators, the rest is in a lock box.
The key is to be mostly invested. I'm in the market at 99+%(never cash) at 90+% of the time.

LewisBraham

I don't think asking what if is the same as making a prediction. A bear market has to happen sooner or later, but I don't think this discussion or the articles have put a specific predictive timeline on it. The better question is trying to predict not when the bear market might occur, but what kind of bear market it might be--long term or short term, depression or recession, inflation or slowdown driven, credit default driven, macro/geopolitical driven--and how one could prepare for that or react to it when it does occur? One could just leave one's allocation alone, but for instance know exactly what one will do if a certain kind of bear market begins--have an action plan in other words. That's different from a prediction.

JD_co

What are the odds that owning digital currency (i.e. Bitcoin) ends up being a good hedge for the next equities "reset"? Is Crypto-currency the newest asset class? Or will it turn out to be more of a speculative fad?

Commodities have had a nice run, and so has just about every other asset class. Cash could be king if MMKT rates weren't zero and inflation wasn't raging. I don't see where to hide. So far, the Fed has kept the bubbles afloat.

Some sort of long/short or market neutral Mutual Fund sounds good in theory, but they often offer questionable returns. Options funds are interesting, and a few might be worth a look.

Also like the idea of PRPFX and possibly some REMIX. But I'm sure there are better ideas out there.

carew388

I've been using JEPI for spare cash, and more than satisfied !

Old_Joe

Once again FD can't resist telling us how great he is and how he never has lost a dime regardless of the market situation. Perhaps he feels a need to remind us of his prowess from time to time, in case we may have forgotten his amazing record.

carew388

+1 old joe If I was as successful as FD, I would be sharing a $50 million yacht parked off St Bart's with Shakira, Zoe Saldana or Halle Berry !

Mona

Old_Joe said:

Once again FD can't resist telling us how great he is and how he never has lost a dime regardless of the market situation. Perhaps he feels a need to remind us of his prowess from time to time, in case we may have forgotten his amazing record.

Count the I's in his last paragraph and don't forget the my and I'm.

stillers

Mona said:

Old_Joe said:

Once again FD can't resist telling us how great he is and how he never has lost a dime regardless of the market situation. Perhaps he feels a need to remind us of his prowess from time to time, in case we may have forgotten his amazing record.

Count the I's in his last paragraph and don't forget the my and I'm.

==================================================
Yeah, Old-Joe, his amazing after-the-fact (sic) Buy/Sell record.

His constant dead horse beatings about ALL predictions and ALL experts ALWAYS being grossly incorrect juxtaposed against his claims that his analysis is ALWAYS correct is mind-numbing. NOBODY on the planet except him it appears can accurately predict the future, and he does it EVERY TIME!!!

The absolutely hysterical thing about it all is every time he makes a dime, real or alleged, "Average Joe Investor" (sic) makes about fifteen to twenty cents.

Interestingly enough he has of late started to reference his secret sauce (the part of his can't miss bond OEF momo trading strategy) as "proprietary" and "under lockdown." I wonder if he's aware of all of the various forums that he posts on rules on stuff like that and those of any other AHJs.

Queue the personal insults and lies about me that have NOTHING of course to do with this but serve as his go-to retort.

hank

It’s nice to be in the company of such a successful investor.

JD_co

"Kiss the rings."

Old_Joe

Kiss his what ??