For This Bear Market, The Worst May Be Yet To Come

For This Bear Market, The Worst May Be Yet To Come
Stéphane Renevier, CFA

over 1 year ago1 min

Mentioned in story

There have been 16 bear markets in the S&P 500 in the past 100 years. And in most of them – 11, to be exact – the steepest losses have happened near the end, not the beginning. Look at what happens when you divide each of those bear markets into three equal time segments: you can see that the market tends to fall twice as far in the third stage as in the first or second. Put simply, the worst of the bear market tends to happen last.

This could be because investors are often slow to accept that the old bull market is over. And instead, they cling to their biases: for example, anchoring (keeping the previous high fresh in their memories), extrapolation (believing the Fed will come to rescue as it has in the past), disposition (growing irrationally fond of their stocks), and underreaction (seeing the worsening environment, but refusing to sell).

Eventually though, when stocks slide far enough or for long enough, those biases give way, and those investors start to sell. That sends prices lower, which leads other investors to sell – and that’s how you get to those really deep lows. And as we wrote here, it’s only after investors have really “capitulated”, or thrown in the towel, that markets can find a bottom and begin an uptrend.

Problem is, there’s no way to know which stage we’re in now. But given we haven’t seen real capitulation yet, you could do well assuming the worst is yet to come, and prepare your portfolio as such.



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