The Bear Market Ain’t Over Till It’s Over

An electric trading board sits above traders work on the floor of the New York Stock Exchange, on Feb. 7, 2023. (Spencer Platt/Getty Images)

Commentary

On Feb. 21, the stock market got hit by a freight train. It surprised a lot of people because unlike the groundhog, they were starting to warm up and think the winter in stocks had ended.

After all, the people who identify as technical analysts brought out their charts and showed why the market could be moving into “bull territory.”  Charts sometimes find themselves at the bottom of the sea.

Perhaps the worst was over! Statistics were on the chartist’s side. Only 9 percent of the time does the American stock market follow a down year by another year in the red. Even after the debacle on Tuesday, we are still in the green this year.

The market might yield a positive return this year. However, it’s not likely to keep pace with historical returns or have a double-digit blowout return. On Stocktwits, I posted a little stream of advice on trading in bear markets.

For those that have never lived through, or traded through, a bear market, all this might be very new to you. Your expectation is that you put money in the market, and it automatically returns more money back to you. That’s not going to happen in the short term.

The first thing to keep in mind is that the people leading the country do not care about economic returns. They only care about power. They don’t care if they grind everyone to a pulp financially as long as they get to rule over the dregs that are left. Admittedly, this is a hard pill to swallow, but it is true. For another example, look at city governments in places like Chicago and San Francisco. Are they run for the benefit of the citizens? The people running the federal government today are cut from the same cloth.

Second, we are in a recession despite the mainstream press’s quest to find one. We had two straight quarters of negative growth. Every day we see big companies laying off more people. McKinsey Group recently laid off 2,000 people. Corporate earnings are not great, either. Venture capital fund raising and investing is way off. That’s not a sign of growth.

Once you understand and accept those facts, then it helps you understand how to position yourself in the market.

The Federal Reserve is not done fighting inflation. We have a lot of it, and it persists. Economists are predicting that the Fed might be done raising rates when they get to 5.5 percent or 5.75 percent, but the current inflation numbers are telling a different story. Watch the 10-year note. It’s at highs, and it is not reversing course.

Here are some concepts of bear markets that you might familiarize yourself with:

• Bear market breaks are always significantly stronger than bear market rallies.
• Rallies happen when you least expect them, and prices go high enough to bring hope to investors, before crushing all hope. Think about the old “Peanuts” comic of Lucy and her pulling away the football from Charlie Brown.
• Despite drops in the market, we have not seen capitulation or “the whites of their eyes” when there is panic selling and a rush to get out at any price.
• No stock or asset class is a safe haven in a bear market. There is no escape. Even if you are in cash, you lose purchasing power due to inflation.
• No one truly realizes the number of large and small asset bubbles that were created with the easy money policy of the Federal Reserve from 2009–20. Layer on trillions in COVID-19 spending and there is a lot of combustible free money to work through.

The bear market will end in two ways. The first would be a finished term for the Biden administration. The U.S. economy under President Joe Biden has been terrible for everyone, and any succeeding Democrat as president likely would perform similarly. Socialism and equity do not work. This is not your father’s Democratic Party.

The second thing that could signal an end to the bear market is if the Federal Reserve were to indicate that it is done raising rates. It takes six months for rate raises to work their way through the entire economic system, and so it will be until the end of 2024, before we see the full effect of Fed action.

Aside, another thing that has to happen is a total reckoning within the Republican Party and with the very singular moderate Democrats who are left standing. America’s tax system penalizes success and innovation, and it is full of all kinds of loopholes. The only reasonable course of action is to overhaul it by getting rid of it and instituting a consumption tax.