Is Wall Street In A Bear Market? by Evergreen Gavekal

We are of different opinions at different hours, but we always may be said to be at heart on the side of truth.” – Ralph Waldo Emerson

This week’s EVA features two recent pieces: Is Wall Street in a Bear Market? by Anatole Kaletsky and Here Comes Daddy Bear by Charles Gave. Below is a brief summary of each author’s piece:

Anatole Kaletsky: Is Wall Street in a Bear Market?

  • The US is not in a bear market.
  • Bear market officially begins at -20%, currently US market is down 12%.
  • The recent market decline is a “pause that refreshes.”
  • This current market has survived a variety of scares like this already i.e.:
    • In 2010, US budget deficit worry, down 15%
    • In 2011, Treasury default fears, down 19.5%
    • In 2012, euro crisis, down 10%
  • During this bull market, corrections have been buying opportunities.
  • Keep an eye on three fundamental issues: China, Oil, and US/World Recession
  • China: If they lose control of exchange rates, it could trigger widespread panic
  • Oil: Low oil prices are a good thing for economies as it really equals cost savings
  • US/World: Stocks, historically, have performed well in times of low oil prices. If prices move higher that could be a headwind.

Charles Gave: Here Comes Daddy Bear

  • There are two types of bear markets: “cub” and “daddy” bears.
  • In a “cub” bear market: 15% type corrections occur over 12-18 month which are just “pauses along the way.”
  • Ursus Magnus (“daddy bear”): In this type of market decline, it will take you 4 years to recoup your losses. In the last 45 years there have been 3 such episodes.
  • Normal bear markets are when share prices/exuberance get too high.
  • Ursus Magnus occurs as a result of a misallocation of capital. (Evergreen’s comment on misallocation: Exceedingly low interest rates fueled over-investment in the energy space as well as record amounts of share buybacks.)
  • Major bear markets need two key things to form: Exceedingly low rates for an exceptionally long time.

Wrestling For Answers

In this week’s Evergreen Virtual Advisor (EVA), two of the financial world’s keenest thinkers tussle over what is top of mind for virtually every investor these days. In their respective essays, our senior partners at Gavekal Research, Anatole Kaletsky and Charles Gave, discuss whether or not we are headed for a true bear market or just another mild and brief correction. Both display sound logic, strong opinions, and agree on virtually nothing.

It is our pleasure to bring our readers a behind-the-scenes look at the exceptional work that takes place at Gavekal on a daily basis. We feel fortunate to have access to their thoughtful research and incorporate it into our outlook and client portfolios. We hope you will find this week’s piece as informative and entertaining as we do.

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Is Wall Street In A Bear Market?


Is Wall Street In A Bear Market?

By Anatole Kaletsky 

As Shakespeare said, “a rose by any other name would smell as sweet”; but he then forced Juliet to discover to her tragic cost that names sometimes really do matter.

The significance of “bear market” nomenclature is not whether a peak-to-trough fall exceeds the supposedly “official” 20% definition, since there is no significant difference between the pain of a 19% or a 21% loss. By that definition, of course, US equities are still quite a long way from “bear market territory”, since the S&P 500 is down only -12% from its record high of May 2015, and even the average stock, as measured by the S&P 500 equally weighted index, is down just -16%.

The real point, as Charles rightly stated in his blood-curdling Ursus Magnus piece last Friday (right column), is that a genuine bear market keeps relentlessly torturing investors who are rash enough to buy stocks—and keeps up the punishment for years on end. Charles, in fact, boldly defined a serious bear market as a downtrend in which investors who buy at the top do not recover their money for four years or more. By contrast, he dismissed a -15% to -20% decline lasting less than 18 months as a mere bear cub that could equally well be described as a “pause that refreshes”.

I fully agree with Charles’s analysis, which captured eloquently, as usual, a key financial issue. However, in my view, this analysis leads to the opposite of Charles’s conclusion that the present decline has all the markings of an Ursus Magnus. On the contrary, it looks rather more like a “cub”, or even a “pause that refreshes”.

The present market setback has not lasted four years, nor even one year. Only nine months have passed since the peak of May 21. Although it is possible that the present decline will get much worse and continue for many years, there is at present much more evidence against, rather than in favor of, such a prediction. This is true not only of the economic fundamentals but also of the market’s internal behavior.

As everyone knows, the upsurge in equity prices that started on March 10, 2009 has been among the most despised and distrusted bull markets of all time. As a result, the bull trend has been regularly interrupted by corrections roughly as large and as scary as the one today. These setbacks have been triggered by a variety of scares, with newfound horror stories materializing on roughly an annual basis. In 2010, the catalyst was fear about the US deficit, which set off a -15 % correction. In 2011, panic about a US Treasury default sent the S&P down -19.5%. In 2012, the euro crisis caused two corrections, -10% in the spring and then -8% in the autumn. In 2013, the panic was about Federal Reserve tapering and a US government shutdown, although these only hit the S&P by -6%. In 2014 carnage in the Middle East and Ukraine catalyzed an -8% setback. And last summer, it was the policy blunders in China that caused a correction of -12%.

Each of these corrections turned out to be a buying opportunity, although the jury is still obviously out about the rebound in September and October last year. But given the consistency of this experience, the question we should now be asking is not whether US monetary policy has been fundamentally unsound ever since 2009 (or even since 1998, as Charles has argued when lambasting Alan Greenspan). We can leave that debate to economists and historians in future decades, when a proper accounting will be possible for the effects of quantitative easing, zero interest rate policies, the global financial crisis and the great moderation. In the meantime, it seems more sensible to focus on the causes of the present market setback and judge whether these problems are likely to last longer and cause more damage than previous panics, such as the US deficit and euro crisis, which have now been forgotten.

Three worries

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