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The Future of Bear Markets

The Future of Bear Markets

Posted On June 11, 2021 3:52 am
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By Ben Carlson 

The 34% Corona crash from late February through late March 2020 lasted just 23 trading days.

Those 23 trading days saw 7 daily losses in excess of 4% along with 5 daily gains of 4% or more.

Investors were recalibrating the stock market and world economy at an obscene pace.

And then it was done, off to the races as the stock market took off and never looked back, reaching new highs a little more than 100 trading sessions later.

Back in the heat of the March 2020 crash, I ran the numbers on how long it takes to make your money back after a bear market:

Here’s what I wrote at the time:

By my count, there have been 24 bear markets since 1928, good enough for one every 3-4 years. The average fall from grace has been a 33% drop, lasting just shy of a year from peak to trough.

There have certainly been fast-moving markets in the past but the latest V is a sight to behold:

The speed of both the crash and subsequent recovery caught a lot of investors off guard.

There were plenty of old-school investors who were licking their chops, planning on buying distressed assets on the cheap. There were trillions of reasons this didn’t happen thanks to the Federal Reserve and the U.S. government.

I cannot predict the future but I do wonder if the future of bear markets will be different going forward.

What if both crashes and recoveries are faster in the future?

Here’s the case for this:

Technology is making everything faster. It’s hard to believe people used to check the evening news to see how the stock market did in the not-so-distant past. Now you can track every stock known to man every second of the trading day.

Tweets can move markets instantaneously as algorithms trade on specific words, phrases or headlines.

The re-pricing of assets happens faster than ever now that we all have the ability to trade, communicate and share opinions from the supercomputers that fit in the palm of our hands.

Gold crashed more than 70% from its 1980 highs. It took nearly 30 years to break even from those levels. Bitcoin crashed more than 80% from its 2017 highs. It took just 3 years to eclipse that peak.

There are some elements of the current speculative boom that are eerily similar to the late-1990s dot-com bubble. But the message boards of the late-1990s pale in comparison to the coordinated meme stock attacks of today’s social media networks. Professional investors or regulators have never dealt with armies of Reddit traders like this before.

It’s like the speed limit on the markets just went from 35 mph to 70 mph but many investors are still stuck in the 35 mph mentality.

The Fed is inextricably linked with the markets now. Last week it was announced the Fed would begin gradually selling the corporate bonds and ETFs they began purchasing during the onset of the crisis.

Considering the tens of trillions of dollars in the credit markets, the Fed’s $13.7 billion portfolio is tiny by comparison. But it’s not the absolute dollar amount that matters; it’s the fact that the Fed has set this precedent.

Every crisis brings with it new tools from central banks for fighting said crisis. The next time they will simply buy more because that’s what the market will expect. And they will still lower rates and buy treasuries and mortgage bonds as well.

And if the Fed doesn’t bring the bazooka out the market will likely force their hand.

There’s no going back now.

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About author

Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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