June 03 2022

The Bear Market That Doesn’t Say Its Name

Outages, shortages, strikes, war, and a quantitative tightening…what can go wrong?

Needless to say that the US economy has been surprisingly resilient in the face of this flurry of bad news. Forerunner signs are appearing of a shift to lower economic activity though. Corporate financing plans have been rethought, Bloomberg estimates that $170BN in deals, including IPOs, bonds, loans and acquisitions have been shelved lately. Households seem ok for now, with low delinquency rates in 1Q22 and jobs plentiful, however confidence level is eroding quickly in the face of higher interest rates and souring global sentiment.

Now, hedge funds are pairing their bets and banks are exhorting to prepare for an economic “hurricane”, in the words of JP Morgan’s CEO Jamie Dimon. Very few are expecting a positive economic surprise.

The market looks like a bear, walks like a bear, and growls like a bear…Let’s face it, it’s a bear market. The bear market following the 2000 internet bubble lasted for 2 years with a ~45% peak-to-trough drop, the 2007 lasted for 1.5 years with a ~55% drop, as measured per the S&P500 moves. So far, the S&P declined by 13% from peak, and a full 50% decline will get it back to covid19 bottom level of Mar20. Whether it will get there is anybody’s guess, but we should assess the likelihood of such eventuality.

Whether you consider this an opportunity or a drama depends on (i) how much you have invested today in proportion of your total net worth, (ii) your investment horizon, (iii) how much capacity you can invest on an ongoing basis to take advantage of this potential drawdown. These are the things you know. Bear in mind that the evolution of markets going forward, how far (if) the dip will go, and the timing of it are unknown parameters.

All things considered; it pays off to be cautious in times ahead.