Timing Isn’t Everything

This bear market in stocks, though grueling, is not (yet) as bad as the Covid bear market of 2020. That decline did 37% in damage (versus 22% today) yet lasted only two months, blunting its lasting impact.

This one has dragged on much longer, making it feel more substantial despite lesser losses. It also distinguished itself by being a tandem bear market in bonds, the worst since 1926, according to the NYT. The combination of a bear in both stocks and bonds has happened before more recently (i.e., stagflation in the seventies, inflationary pressures after WWII) but it’s the one type of market decline that sends conservative portfolios skidding as well: the S&P 500 is down 22% but even the staid long-term Treasury (as measured by the TLTTLT
) is down a shocking 29%. This has made it the worst year for balanced portfolios in nearly a century. The benchmark conservative index (as measured by the AOKAOK
) has lost a shocking 17% year-to-date.

This bear market has lasted nine months. It’s worth noting that the average bear lasts 289 days, not far from where we are. Bear markets can last longer than a year (or even two), but that’s rare. Historical context would suggest we’re probably at least halfway through it in terms of time and well more than that in terms of price. Never are there any guarantees, but past market cycles would suggest it.

That said, no one can time bear markets or actually predict their duration. If that were possible, market-timing would work but all data points strongly elsewhere. It’s still hard for investors to resist the siren call of market-timing, but they must. Evidence proves it doesn’t work. It may appear to work one time but it then inevitably fails the next. That’s the nature of speculation. And investing must be as data-driven as medicine. A technique not statistically shown to work should not be tried—any more than going vax-less. What should be followed instead is value investing: the long-term ownership of high-quality assets trading at a discount to their intrinsic value. This strategy, statistically proven to work over time (unlike market-timing) is hard for many to follow because it requires ponderous patience and careful fundamental analysis of the underlying financials.

The bond market is the most vexing problem so far. Unlike money lost in quality stocks (as opposed to crypto and other garbage), investors are surely worried money in bonds may not be fully recovered. Some of it won’t. But quite a bit of it might. Bond markets have overreacted—and now appear to be too pessimistic—pricing in a Fed Funds rate well over 4%. The last time the bond market panicked on this scale, Treasury bond losses of 8% in 1994 were followed by 23% gains in 1995. Lesson: it could be as poor an idea to time the bond market as the stock market. Many will capitulate and panic somewhere along the bottom, in both stocks and bonds, and live to regret it two ways.

Back to the main point: at these times it’s hard to remember that bear markets have always come to an end—and then have always soared to higher highs. That’s been the story of markets going back over 100 years. It’s always two steps forward, one step back—but then, crucially, three steps forward thereafter. The evidence is simply incontrovertible: the Dow was at 41 in 1932 at the lows of the Great Depression. It now sits at 28,943. And that doesn’t include dividends. It accomplished this feat while slogging through the Great Depression, World War II, Nagasaki, Hiroshima, the postwar inflation of the late 1940s, the Korean War, the Vietnam War, Nixon, the stagflation and crippling energy crisis of the 1970s, countless hurricanes and natural disasters, the ‘87 Crash, the HIV crisis, the 1994 bond bear market, the 2000 dotcom bust, 9/11, interminable conflicts in the Middle East, the 2008 financial collapse, the invasion of Crimea (and the nuclear saber-rattling back then), the unprecedented assault of Covid and lockdowns in 2020, and the January 6th insurrection. Unfortunately or fortunately, it will go on to endure much, much more.

Like cockroaches, stocks will continue marching forward long after we’re gone. The trick is to stay invested in high-quality assets, reinvest cash into opportunities created by the downturn, and wait for the tide to turn, as it inevitably does. And stay away from market timing, which leads more investors astray from their retirement plan than does any other dangerous speculative activity.