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The bears are back in town

By: Devan Robinson

"The four most dangerous words in investing are: this time it's different." -Sir John Templeton



Disclaimer: This post is for educational purposes only and is not investment advice.  The securities mentioned are for illustrative purposes.  Devan Robinson and clients of Fairlead Financial Group may own positions in the securities mentioned.


The bears are back in town

With the S&P 500 down roughly -20% year to date it's now officially a bear market.  The silver-lining is you're probably closer to the rebound than more drawdown but waters are murky.  Bear markets are unpredictable and this is where a lot of investors tend to make mistakes.  What happens next?

In the long-and-medium term I have a fairly good idea of what markets will do.  History & capitalism give us a pretty reliable roadmap.  In the short-run, I have no clue.  I never do.  But here's the beautiful thing: you don't need to know the short-term to win in the end.

No two bear-markets are alike.  They're always different.  The COVID-19 crash was different than 2018's US-China Trade War.  2008's real-estate implosion was different than 9/11.  The tech-bubble was different than 1987's flash crash.

You see the idea.  They all ended the same way though.

The thing all bear markets share is they give rise to bull markets.  From here on out on it's not a matter of if it ends, but when it ends.  Every bear market ends in a new bull market.

First Trust has a great visual illustrating bear market drawdowns and the subsequent bull markets:

Past performance may not be indicative of future results. Indexes are not available for direct investment.

I love this visual.  It reminds us to keep our eyes on the road ahead.  Here's a link if it's hard to read.

Once you're past -20% it's easy to make consequential decisions.  Not because of more drawdown but because you're probably approaching a new bull market.  From a planning-perspective it is 1,000x more important to not miss the bull than it is to avoid the bear.  

But for many investors this is hard.  Our brains are hardwired to want to get out right at the moment we shouldn't.

Ask anyone in this business to define brutal, especially if they were around in 2008.  Brutal isn't a temporary drawdown.  I mean of course drawdowns aren't fun but all it requires is time, patience, and stomach.  Brutal is cashing-out in 2008-2009 and missing the 400%+ rally that was starting.  Every advisor has seen it before on statements.  That's rough.

In behavioral finance it's called myopic loss aversion.  Our tendency to desperately avoid any kind of drawdown on our assets.  Financial advisors see it constantly.  It happens in all forms of speculation; from investing to gambling to sports.  The psychological pain of loss outweighs the joy of gain. 

It's just how we're all wired by default.

How do bear markets tend to play out from here?

There tend to be two varieties of bear markets:

  • Bear markets with a deep economic-recession.  These can last awhile.
  • Bear markets with a shallow-recession, or no recession at all.  These are shorter.

Thus the recession question dictates what happens next.  That leads us to the million-dollar, if only I could see the future, question:

Are we in a recession?

Personally, I don't think we're in a recession at the moment.  If we are it's a pretty shallow one.  If I was forced to guess I'd say a recession is much more likely in late-2023 or 2024.  It would probably look like the recessions of 1990-91 or 2001 where unemployment rose 2-3 percent.  Not the cataclysmic job-losses of 2009 or 2020's COVID-lockdowns.

I'll probably eat my words on that prediction.  Time will tell.

I'm certainly not saying all is going swimmingly with the US economy.  It's not.  Inflation is a menace taking a huge bite out of paychecks and nobody is enjoying their 401k statement right now.  But it feels like pundits are fighting over the academic definition of a recession and missing the forest for the trees.

If everyone is calling for a recession, why aren't you Devan?

I don't have a satisfying answer.  I simply just don't see it.  The economy of my daily life and chatting with friends & clients isn't what I see on television.

What do I mean?

Businesses just keep hiring workers and unemployment relentlessly grinds downward.  The +390k jobs created in May was the worst of Biden's Presidency.  Sounds bad right?  Here's some perspective on that number: +390k jobs is better than 95% of months since 1960.

Businesses don't appear to be slowing investment.  On Monday, core capital goods orders (think of that as business investment) grew 0.5% and accelerated over April.  PMIs were slowing, but still growing, as consumers shift spending from goods to services.  Business seems to be humming.

With the exception of the tech-sector most executive commentary looks confident to me:

  • Nike's CFO this week noted "we continue to closely monitor consumer behavior and we’re not seeing any signs of pullback at this point in time."  
  • Disney's CEO noted their parks are nearing 100% capacity yet Disney stock is priced near its 2020 COVID lows (when Disney parks were literally closed).

Past performance may not be indicative of future results.

Here are some more snippets I kept from last-quarter: 

  • UPS: "So it seems like the hotels are full, the planes are full, and people are going out to eat, and, gosh, I was in Washington, D.C. last week and the bar was hopping at midnight, so people are spending money differently than they would."
  • Snap-on: “Spending on vehicle maintenance and repair is up, and technicians are earning more than ever. They’ve been working, performing essential tasks, making a nice living. They’re undaunted by the turbulence and they are optimistic about the future of their profession, about the outlook of individual transportation and about the greater need for their skills as the vehicle parts change with new technology."
  • Tractor Supply: "As it relates to the economy, so far the consumer has shown real strength and their ability to kind of navigate the inflation."
  • Equifax: “I don’t know how to talk about what environment this is. It’s certainly not a recession.”
  • Dow Chemical: “Despite elevated inflation, consumer spending continues to grow and balance sheets remain healthy with household debt service levels at some of the lowest levels in the last 30 years. Industrial activity also remains robust with Global Manufacturing PMI continuing to point toward expansion.”

I wrote a month or so ago I felt this market was a tale of two-markets.  That's still how it feels to me.  When I read commentary like this I can't help but imagine someone is really-right and someone is really-wrong.  A world ripe for opportunity.

I don't think you can really study past recessions to uncover a playbook this time.  Pundits compare this economy to the 1970's but the 1970's didn't have internet and software companies.  Yes, the 1970's had inflation and high-gas prices but it was a completely foreign world to today.

If anything it's fascinating stuff.

Useless predictions aside, what's an investor to do?

For most investors the bear-market playbook is simple: hang tight and keep investing.

Bear markets are part of the investing process.  It will pass.  A new bull-market is creeping around the corner.  When?  I have no idea but the bull is lurking somewhere.  It could be six-months from now, next month, or two-years from now.

If you're young: just keep saving and investing.  When in doubt, invest more.  Your future self will thank you.

If you're retired, or nearing retirement: trust and work your financial plan.  Financial planners build bear markets and recessions into the models driving your portfolio.  You're going to be fine.  Retirees are living longer than ever and a healthy-allocation towards equities is required to bridge that gap.

If you're worried about a recession & layoffs: save more money and plan for it NOW.  I worked for a manufacturer right out of college and witnessed three-rounds of layoffs.  My personal takeaway was no one thinks they are the ones who will get cut.  Everyone thinks they are essential.  Obviously I'm skeptical of a major recession but I'm also terrible at economic predictions.  If your instinct about your job is worry, follow that instinct.

If you invest in individual-stocks: know what you own and remember it can always fall another 100%.  Everyone loves to critique broad-diversification & index-funds until the market gets wrecked.  Indexes don't die but plenty of companies do.  Life in a broadly-diversified portfolio is pretty simple.  Individual stock picking is a much, much more difficult game.  Respect that game and it will respect you back.


A man for all markets

I'm a huge fan of billionaire investor Ken Fisher; he's on my short list of opinions I read religiously.  In my mind Ken is probably the greatest financial advisor of all-time.  Funny enough his father, Philip Fisher, was also a legend.  Philip's classic Common Stocks and Uncommon Profits is easily in my top-5 favorite finance books.  They're brilliant minds.

I suppose when Warren is quoted on the front of your book you've done pretty well.

Longtime readers of Ken Fisher probably know his pod-principle: pessimism-of-disbelief.  Pod is a psychological-indicator Ken uses to gauge where we might be in a bear-market.

The idea is this: pessimism-of-disbelief is when investors begin to start framing good news in a negative light.  It's a subtle, psychological shift that happens during bear markets or big corrections.

Take the May jobs report (+390k) as an example:  While normally May would be a universally good report, suddenly it's bad-news because it means the Fed may need to raise rates even further to slow the economy.

Put another way: rather than good news simply being a yes, it's now a yes, BUT...

  • Yes, China is ending their current wave of COVID-lockdowns BUT supply-chains might get crowded again.
  • Yes, oil-production is increasing BUT China's reopening might soak it up.
  • Yes, the dollar is no longer weak BUT now it's so strong it's hurting emerging markets.
  • Yes, savers finally earn some return on their savings BUT look at mortgage rates.

Ken argues the subtle shift in investor framing is a hallmark of nearing a market bottom or the early innings of a bull-market.  It's classic investor psychology.  When the pain is acute you're only thinking of how it might get worse (remember myopic loss aversion).  This tunnel-vision can trick you into missing the good news around you.

Remember two-important points about bear markets: 

  1. The crowd is ALWAYS wrong at major inflection points in the market.
  2. Bull markets don't begin on good news.  They begin when bad news isn't as bad as we thought it would be.

As Sir Templeton famously said: "bull markets are born on pessimism."


A rare technical-indicator

A week or so ago the S&P 500 triggered a pretty rare technical-indicator: back-to-back 5%+ weekly declines.  Bespoke highlighted its occurrences below:

Source: Bespoke Investment Group. Past performance may not be indicative of future results. Indexes are not available for direct investment.

It's always been compelling to me as a contrarian indicator.  It makes sense to me: 10%+ in two-weeks is not normal, orderly selling.  It's probably panic selling.  It's getting calls from clients and partners saying get me out, I don't care what price.

Technical indicators like this never give answers but they help work out your probabilities.

Berkshire's big bet

In my prior post I noted the boys at Berkshire-Hathaway were buying into this market pretty aggressively.  

Monday we learned from a filing that Warren is still pressing the gas on his buying as he gobbles up more Occidental Petroleum.  Typically we can't see his purchases in real-time but in this case Berkshire owns so much OXY he's required to disclose purchases immediately.  He prefers to fly under-the-radar as much as he can, but once you own  10%+ of a company you're forced to disclose within two business-days.

We won't know the true extent of Berkshire's buying & selling until mid-quarter but Warren is certainly bullish on energy.  That much we know.


I enjoy writing these columns much more than I expected.  Are they useful for clients?  I don't really know.  Are they useful for me?  Incredibly.  

I've always tracked my investing activity religiously.  Noting my thesis, my rationales at the time, how I perceived the field, etc.  It's a great exercise to hone your skills.

Writing publicly really amplifies it for me.  It forces me to clarify my thoughts.  I also never truly appreciate how dumb I am until I try to put a thought to paper, it's remarkable.  That's why it takes me so long to write these!

I'm often asked if I'm bullish or bearish on the market.  It's a complicated question.  A friend jokes I only have two-modes: bullish and extremely-bullish.  I have to admit it's pretty true; at least when it comes to the broad market.  There's plenty of individual stocks I'm bearish on but I'm almost always bullish on American business as a whole.

And, for what it's worth, I put my money where my mouth is.  Good or bad.  I'm almost always overwhelmingly long but I'll short individual stocks from time-to-time.  I'm mentioning this only to clarify that while I appear permabull-ish in my writing that's not the full truth.  I've made, and lost, money in both directions.  It's simply much easier to win as a bull than to win as a bear so that tends to be my position.  Plain and simple.

Now that we've established I'm usually bullish, how bullish am I?

Extremely bullish.  

Going back through my notes & old posts I don't think I've been this bullish since I wrote "Even more coronavirus, terrible unemployment data, and the blitz spirit" on March 27th, 2020.  I'm not making any predictions; I don't know how markets resolve in the near-term.  I'm simply noting the similarities in my mindset, personal investing, and journal-thoughts between now and then.  

It's one of the great privileges of my life to be a steward of your capital.  I feel you deserve to know my unvarnished thoughts, right and wrong.  My writing is, and always will be, my thoughts and my thoughts alone.  Not a marketing department.  Not a team of analysts.  Simply Devan (C+ writing ability and all).

Thank you for the opportunity.  

It doesn't feel like it, and it may not for awhile, but your future self will be glad you gutted it out.  This too shall pass.  

Sincerely, 

Possibly the last bull standing, Devan Robinson.

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