The Bear Market is here. What Now?
June 15, 2022
With the recent confirmation of a Bear Market finally taking hold, I’ve gotten some requests to comment on the situation: Are we going to have a recession? What’s my inflation outlook? What to expect from the Federal Reserve? What does this all mean for us in the FIRE community?
Let’s take a look…
Just to be sure, the Bear Market started in January, not on June 13!
I made this point in a post two years ago pointing out the challenges of pinning down the stock market (and also economic) turning points: If we define a bear market as a drop of 20+% then the bear market is confirmed once we hit the 20% drawdown. But the bear market started on the day after the previous all-time high. So, we’ve been in a down market since January 4, when the S&P 500 dropped from its all-time high. By only 3 points to 4,793.54. We just didn’t know it back then. Sometimes ignorance is bliss! Why is this important? It’s good news, of sorts, because if go by the average length of bear markets of maybe 1.5-2 years, we’ve already lived through about 5.5 months of it. Yay!
Of course, I always like to issue the warning that the length of the bear market is meaningless. What matters is how long it takes for the market to recover and reach the next all-time high again, which could take many more years. And when adjusting the portfolio for inflation the recovery can sometimes take a decade or more, as I outlined in my old post “Who’s Afraid of a Bear Market?” in 2019.
Will we have a recession as well?
Not every bear market is accompanied by a recession. All of the prominent ones were, but we’ve had a few without a recession, for example in 1987. And a few “close calls” like the fourth quarter of 2018.
In any case, what’s the economic outlook? Am I worried about a recession? I’m no longer a full-time economist. Even the short consulting gig as a “Chief Economist” for a startup only lasted for only a year in 2021. So, not willing to run a big forecasting model, which is at least a part-time maybe even a full-time job, I like to keep things simple. As I introduced in a 2018 post, here are the three indicators that I like to follow as a hobby-economists to monitor the health of the economy and the prospect of an economic slowdown:
1: The slope of the yield curve is one of the most reliable recession indicators. At some point before the start of the recession, all those smart folks working as fixed-income traders apparently sense that the Federal Reserve will first yank up rates and then lower rates again 1-2 years down the road, in response to the slowdown. This will push short-term rates higher and long-term rates lower. And apparently, those fixed-income folks were so smart that they even predicted the 2020 pandemic recession with a very brief yield curve inversion in August 2019. Some of them must be virologists, who knew?! Joking aside, financial markets probably didn’t have any inside knowledge and even without the pandemic, there might have been an economic slowdown around the corner.
In any case, that yield curve signal again flashed (slightly) red in early April of 2022. It’s a slightly worrisome signal, but the brief and very shallow YC inversion isn’t that concerning. For example, in 1998 we had a similarly meek inversion and the recession took another 3 years to take hold.
The series finale proved Tom and Greg are the only Succession couple worth rooting for.Courtesy of David M. Russell…