Bulls and Bears, Bears and Bulls. I’ve always thought labeling people Bulls or Bears was misleading. It fails to capture any nuance or what inputs they’re considering in their investment process as well as failing to take into account their time horizon or their ability to change their mind and pivot.
The financial media, in a never ending effort to create conflict, associates a positive connotation with Bulls and negative one with Bears. The thinking is risk asset prices going up are good for everyone and therefore someone not on board must be the bad guy.
This speaks to the massive conflicts of interests prevalent in the financial system. For starters, financial institutions need the risk assets that they peddle to suspecting and unsuspecting clients to go up so they can keep peddling them. Obviously there is a sort of a greater fools theory at work here, but financial markets spend most of their time going up, so this is a logical marketing angle. But that means it’s in a financial institution’s (who is in the business of selling securities and/or advisory services) best interest to be optimistic about the markets almost all the time. Heck, Merrill Lynch, one of the oldest brokerage firm in America’s logo is a freaking Bull, and their tagline from time to time has been some crap like Bullish on America.
But then there’s the unloved Bears. Eventually they will be right! But that’s when the sanctimonious Bulls will merely remind the world that a broken clock is right twice a day and markets spent so much more time going up than going down.
I have been an active U.S. equity market participant since the late 1990s, and over this time period I have witnessed prolonged periods of universal bullishness that in two instances resulted in peak to trough declines in the largest stock market in the world of 50%. Cut in freaking half. This has happened two times in the last 15 years. In the months leading up to declines in March of 2000 and November of 2007 bullish sentiment was emboldened as markets went up for a lot longer than the heretic Bears and their tone of caution could predict. But when the Bears are right it happens quickly. Suddenly complacency becomes fear.
As an investor we are generally prone to agree with the consensus (long stocks) But it always makes sense to be at least familiar with the Bear case. That comes in handy at a moment like this when investors are wondering whether a little correction turns into a full blown crash.
SO WHAT NOW?? The S&P500 (SPX) has corrected, down about 13% from its recent all time highs, down 10% on the year, all coming in the last week. Markets generally don’t crash from highs (although the Shanghai Composite just did). Prior to last week, the SPX was churning for the better part of 2015. The Bulls were telling you (until just last week) that this was a very healthy basing process that would be met with new buyers and result in an eventual explosion to the upside.
The Bears (but let’s just call them bull market skeptics) pointed to waning momentum, weak breadth and massive divergences. Bulls said buy the dip, skeptics said start to sell rallies. But while you may be trading on your iPad, this is not a game of Grand Theft Auto. The stock market crashes of 2000 and 2008 not only caused a great deal of pain in 401ks but through the economy into recessions. That’s when it gets real. People get laid off. Wages go down. Car payments missed. Houses foreclosed.
Because Bulls have a strong vested interest in risk assets going up they are not likely to change their tune until it’s too late. While those that can be more skeptical, will only be right for a fleeting moment. But that’s a very important moment when so much is at stake.
Only you can make prudent decisions about your investments. You can listen to your broker, financial advisor, some bozo like me on TV or the internets. But the decisions that you make at tops or bottoms of markets are the ones that make a difference over the long term.
Staying the course is fine over a long enough time period. History shows us if you wait long enough blue chip stocks always come back. But that can not be said for so many stocks that Johnny-come-lately’s crowd into near tops. like gimmicky internet outfits, 3d printing companies, biotechs with massive losses and no sales, or solar stocks.
The Bull – Bear thing is stupid. More a creation of Madison Avenue than Wall Street. The cracks in the seven year bull run in the U.S. stock market have been evident all year. It has been my view for months that when the Chinese equity bubble burst it would trigger a series of knock-on effects that would eventually reach U.S. risk assets.
To be prudent, investors should be prepared to take losses in stocks that they didn’t intend to stick with for years. There are really strong rallies in volatile markets like this (yesterday’s was a great example). Those rallies are great opportunities to lighten up and second chances to look at some of the more speculative positions in your portfolio.
As Mike Tyson once mumbled, “Everybody has a plan until they get punched in the mouth.” By year end it’s possible we are back to levels where we were just last week. But we could also be more than 10% lower. And the volatility between now and then may make it feel worse than that.
That may not be too helpful at this stage of the game, but the volatility that has enveloped global equity markets, commodities, bonds and currencies for the last year has finally come home to U.S. stocks and I suspect it is likely to remain so until the external factors cool. U.S. equity investors that had become trained to buy every 5% dip just got punched in the mouth. It’s time to have a new plan.