Bear Markets Come in Both Percentage Declines and Amount of Time

CAMS Weekly View from the Corner – Week ending 4/24/2020

April 27, 2020

When it comes to labeling a market environment as a bear market the typical view is if a major well known index declines by 20% then a bear market has occurred.

For my part, bear markets usually consist of both a significant price drop coupled with quite a run of time and when this occurs the masses realize something is out of order market wise.

For example, in the fall season of 2018 the stock market went into a bear market as defined by the 20% decline marker and yet the masses didn’t realize we experienced a bear market because the 20% drop was quickly erased to the upside within several weeks.  That experience certainly did not change any behaviors by the masses when it came to their investment views and approaches.

True bear markets get the masses thinking whether they should be involved in stocks any longer.   Historically, for that collective psychological state to occur it usually takes both notable price drops underlined with duration of time.

Why Does This Matter

It has been over a decade since we have experienced a true bear market whereby the masses significantly question where they are placing their savings.  There have been notable price drops over the last 10 years but as described above with the fall of 2018 experience, they were quickly erased to the upside.  This process has reinforced to all that if markets do fall they will come back quickly – no problem.

Our current market experience may fit this bill to a tee, yet again and if so – no problem right – everyone (investing wise) will proceed as though nothing occurred.

One of the many big picture questions we are examining is whether this market will be a true bear market whereby the already experienced historical price declines will be enhanced further with a notable amount of time whereby the masses begin to change investing behaviors which could further entrench the established bear market.

This all can occur while still never going to a lower low than we had experienced several weeks back.

One of the keys to managing assets is to be flexible enough to roll with the market backdrops and preferably be in front of them as soon as possible to be positioned accordingly.  In a previous Weekly View we shared the very early observation that the market may be in the early stages of a stock pickers market.

One of the hallmarks of such is whereby the broad market indices do not make much progress on a consistent trend basis (and remains in bear market stance) and yet a number of individual stocks put in solid upward trending price performance.

The significance of this is in such a market backdrop the proverbial “well diversified portfolio” is ripe for under-performance if not disappointment while a more concentrated portfolio mix may win the day.  At this stage it is too early to label the market backdrop as such but yet we have seen some very early indicators of it beginning.

The overriding point of the above is simply we have all become accustomed to notable price drops being quickly erased and with this no change is necessary.  If this market becomes a true bear then there will be rethinking taking place by the masses and that process alone will be something we have not experienced for some time.

Let’s not forget, before the onset of the COVID-19 Virus the stock market had been running at historically high valuation levels.  That backdrop alone puts upward trending bull markets in harm’s way.  Add to that societal upheaval and significant uncertainty and said bull market can be extinguished in favor of the bear.

If we see this unfold it will be collectively blamed on the Virus when in fact the deep underlying issue –  market wise – was the tremendously high valuations the market was carrying for some time and the Virus aided in the full demise of the bull market.

We continue to watch closely for how this market story-line wants to unfold.

I wish you well…

Ken Reinhart

Director, Market Research & Portfolio Analysis

Portfolio Manager, CAMS Spectrum Portfolio

Footnote:

H&UP’s is a quick summation of a rating system for SPX9 (abbreviation encompassing 9 Sectors of the S&P 500 with 107 sub-groups within those 9 sectors) that quickly references the percentage that is deemed healthy and higher (H&UP).  This comes from the proprietary “V-NN” ranking system that is composed of 4 ratings which are “V-H-N-or NN”.  A “V” or an “H” is a positive or constructive rank for said sector or sub-group within the sectors.

This commentary is presented only to provide perspectives on investment strategies and opportunities. The material contains opinions of the author, which are subject to markets change without notice. Statements concerning financial market trends are based on current market conditions which fluctuate. References to specific securities and issuers are for descriptive purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. There is no guarantee that any investment strategy will work under all market conditions. Each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. PERFORMANCE IS NOT GUARANTEED AND LOSSES CAN OCCUR WITH ANY INVESTMENT STRATEGY.