Stop worrying: This isn’t how a bear market starts
When stocks plunge just after alltime highs, like last week, be optimistic, not fearful.
If you’re fully invested, sit on your hands. Hard! For cash holders, this action prescribes buying. Always stay cool. Fight any urge to sell. It’s all signaling more new highs ahead.
Bull markets don’t end this way. These sell-offs end fast, then bounce.
Last week — and the week before — were classic off-the-top correction-type gyrations. Purely psychological, corrections are scary but normal inside bull markets. These drops of at least 10% come and go without warning, for any or no reason. There might be more ahead. Maybe tomorrow. You can’t know.
In the 92-year history of the Standard & Poor’s 500, we’ve had 49 episodes that, top-to-bottom, fell less than 20% but fully 8% — like this recent downturn. They last a week, or six to eight weeks. They leave as fast as they come. But what they don’t do is become big bear markets (which start very differently).
This latest fall felt extraordinary because the prior 14 months were unusually non-volatile, without any down days uglier than 2%. But within this bull market’s nine years, we’ve had fully 52 of those 2+%-uglies.
Last Monday’s 4.1% “cliff ” felt huge, the worst day in years, but just the sixth worst inside the bull market. Folks forget.
Envision volatility in a bull market like whitewater during river rafting. The water goes where it’s going. You just need to stay onboard and in the center of the stream to make it through.
Real bear markets, however, are more like Niagara Falls, with long, bigger declines of 20% to 50%, and large, bad, real-world outcomes — like recessions. They’re trickier, too, so it’s worth comparing how bear and bull markets start.
Bears begin softly. The calm before the storm. No early announcement. No plummeting out the gate. Hidden in silence. In other words, bears begin where bulls end. Legendarily, “Bull markets die with a whimper, not with a bang.”
Bear markets are born on euphoria, grow on grinding economics, mature on recession and die on panic. They begin temptress-like, luring folks too fearful to tread before — then navigating them far from shore where they can’t get back, before plunging them off Niagara-like cliffs.
The first few months of a bear market are minor at most. Pain comes later. Typically, about two thirds of any bear’s percentage drop comes in the final 30% to 40% of its months — the waterfall.
Because bear markets start gently, you needn’t anticipate or see them fast. Slow down. Take several months pondering whether any pullback may be a real bear. My 1987 book, preceding that year’s epic crash, introduced my “three-month rule.” It prescribes never calling any market peak until three months past higher global prices. While, for sure, I haven’t seen all bear markets correctly, my three-month rule has always been true for global stocks, including famous years widely mythologized as sheer cliffs, like 1929 and 1987.
It’s a bull market. Where sentiment pushes prices next week, or next month, is impossible to know. For now, patient, diversified, owners of big, high-quality stocks should see happier times ahead in the bull’s next up-leg.