Did You Hear The Bell?

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Photo by Jonathan Borba

In my May 2022 blog Barely A Bear I mentioned the old market adage that they don’t ring a bell at the bottom of a bear market. We never know where the bottom is until we can clearly see it in the rear-view mirror. So far it looks like mid October was the low for the U.S. market, so I thought it was timely to look at whether the bear market is over, and what that means for your asset allocation.

Tinkling Bell

In the chart below I updated the second chart in “Barely A Bear” to reflect the current low for the U.S. market (S&P 500) back in October.

Chart 1

Looking at the left side of the chart, if October 2022 was the low for the U.S. bear market then it lasted 9 months. That would be much shorter than the median of 16 months. The right side of the chart shows the percentage decline. The 2022 bear market’s 28% decline was smaller than the median decline of 35%.

So based on the shorter duration of the bear market and the smaller decline compared to the median, there was only a tinkle of the bell to indicate that the bear market has bottomed.

Ringing Bell

Chart 2 below looks at the bear market from a different perspective. In this case it shows how much of the gain in the previous bull market was retraced.

Chart 2

The 2022 bear market retraced 51% of the gain in the previous bull market from March 2020 to January 2022. This is very close to the median retracement of 58%. As you can see, most bear markets fall into a range of 50-60% retracements, with the exception of the big bear markets that started in 1929, 1968, 1973, and 2007.

Based on this perspective, the bell rang a little louder in October 2022.

Clanging Bell

What will it take to say the bell clanged loud and clear in October? Unfortunately, it is more art than science, and completely backward looking. Once the low is many months behind us (so far so good) and the S&P 500 is up about 25% or more from that low (we are getting there but have not yet reached it) we are usually in a new bull market. Obviously, this is not much help in terms of timing the market, so it is better to stay invested instead of trying to time the start of a new bull market.

What the Bell Tells

Given that there is a good chance the U.S. market bottomed in October, what does that mean going forward for your asset allocation? I expect the next year to continue to be volatile but in a general upward direction. The market typically climbs a “wall of worry” coming out of a bear market, and we still have worries to work through such as:

  • Inflation is still higher than what central banks are comfortable with
  • Credit conditions, based on the U.S. Senior Loan Officer Survey, indicate that business credit is getting harder to access, and recent bank failures may exacerbate the situation
  • Economic activity, as measured by the Institute for Supply Management’s Manufacturing PMI, continues to show that U.S. manufacturing activity is contracting somewhat
  • If the economy slows too much it will result in lower earnings for businesses

But the S&P 500 (and other stocks markets) is still lower than its peak in early 2022, and as I reviewed in my January blog CAPEd Crusader: Updated 10-Year Returns, the cyclically adjusted price earnings ratio estimated an annualized return of 6% for U.S. stocks and 8% for Canadian stocks over the next 10 years. So keep focused on the long term by staying invested, try to ignore the short term ups and downs and worries, and ensure you have the right asset allocation for your risk tolerance and financial goals.

Invest Wisely,

Dave Schaffner, CFA

Principal, Wayfairer Capital Management Ltd.