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Stock investors have a lot more grieving to do before the bear market breathes its last.
According to the five stages of bear market grief, which I addressed in mid-May, we’re currently at stage three. That leaves stages four and five to suffer through; unfortunately, these are the most painful.
To summarize, the five stages of bear market grief have parallels to the five stages of grief introduced by the late Swiss-American psychiatrist Elisabeth Kübler-Ross:
- Denial
- Anger
- Bargaining
- Depression
- Acceptance
Judging where the stock market is in this five-stage process is not an exact science. Investors may be further ahead or further behind. In mid-May, it was still possible to deny the bear market’s existence, for example, since the S&P 500
SPX,
had not yet dropped 20% from its all-time high.
Most investors have moved beyond stages one and two. It’s been six weeks since the S&P 500 satisfied the bear-market criterion and investors’ focus has shifted into survival mode. This brings us to the third stage, when (as I wrote in mid-May), “Investors redirect their energies to figuring out if they can maintain their lifestyles despite the portfolio pullback; retirees rejigger their financial plans to see how they can avoid outliving their money.”
Consider a recent tweet from Ryan Detrick, the perceptive chief market strategist at Carson Group. He pointed out that, since 1982, the stock market has completely recovered from bear markets within five months or less if the losses were less than 30%. Since the S&P 500 at its mid-June low was 24% below its all-time high, this statistic would appear to be good news — suggesting that stocks may be back in new all-time high territory by year-end.
In other words, this bear market isn’t so bad after all — as long as its loss doesn’t exceed 30%. This is a classic “bargaining” perspective. As Kübler-Ross pointed out, in the bargaining stage we attempt to regain control over a situation by exploring an endless number of “what if” and “if only” statements. Yet trying to control a bear market is laughable. As she argued, this stage in effect is nothing more than a defense against feeling pain.
There aren’t only psychological reasons for why we shouldn’t take too much solace from the quick recoveries from the past four decades’ shallowest bear markets — a sample that, per Detrick’s calculation, contains just four examples. Some questions:
- Why choose 1982 as the cutoff? Unless there are sound theoretical or statistical reasons for doing so, it’s a red flag when focusing only on a small subset of a bigger database. A far different picture emerges from the September 1976 to March 1978 bear market, for instance. During it the S&P 500 lost 19% but, according to Detrick, it took 17 months to recover that loss. If you take inflation into account, recovery took a lot longer: according to my calculations of the S&P 500’s dividend- and inflation-adjusted return, it took almost four years for the stock market to dig itself out of the hole created by that 1976-78 bear market.
- Shouldn’t the Federal Reserve be acknowledged for helping the stock market recover quickly? Take the February-March 2020 bear market, for example, which far exceeded the 30% loss threshold. Nevertheless, complete recovery took just five months, and the Fed’s extraordinary stimulus deserves the lion’s share of the credit. In fact, one could argue that the dominant factor behind this quick recovery is the Fed, rather than the magnitude of the prior bear market’s loss. This possibility is especially important to keep in mind now, since far from easing monetary conditions the Fed is taking away the punch bowl.
The bottom line? It’s possible to slice and dice historical data in many different ways to support predetermined conclusions. I’m reminded of Adlai Stevenson, the Democratic candidate for U.S. president in the 1952 and 1956 elections: Mocking his opponents, he reportedly would say “Here is the conclusion on which I will base my facts.”
None of this means that the stock market couldn’t stage a strong rally in coming weeks. But if my analysis is on target, be on the lookout for the final two stages of bear market grief — depression and acceptance — before a major new bull market can begin.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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