bull markets don't last forever

I must say, it’s certainly been a very unusual bear market since the Covid19 crash. In fact, I even hesitate to call it a ‘bear’ market’ considering it literally fell, bottomed out and has proceeded to move upwards ever since. Depicted graphically, share markets are now forming the classic ‘V’ shape, indicating the surrounding economic environment it would seem is going from strength to strength. Historically, bear markets, are always ‘W’s or ‘U’s and even ‘L’s, but ‘V’s, never! 

Bear conditions by their very nature shake investment markets to the core, and in doing so, eject the many newer investors who ride the ‘gravy train’ in the carriages marked hubris and hope. Alas, the road to riches has always been littered with those investors who believed that bull markets go on forever and that ‘this time it’s different’.

But that’s not what’s happening. Market confidence is incredibly high for some reason. And here we are, faced with a pandemic. A global medical emergency, capable of wiping out millions of people, that has to this point no known cure, nor a vaccine this side of 12 months away!  A medical emergency, controlled so far, by governments shutting down their economies to limit the spread.  

And one doesn’t need the insight of John M Keynes to realise that totally shutting down an economy has got to have some real ongoing effects.  But here we are, with share valuations rapidly returning to their pre virus highs and investors are paying scant attention to the realities of the situation.

Now every bear market in history has, as its root cause, some form of inhibiting economic factor that hampers economic growth and therefore company profits. But this time the hampering has been totally engineered by Government in order to protect the population from what would appear to be a much greater threat.

bull market

There is no precedent or none that I can ever recall, so the path forward is as unchartered as the moons of Jupiter. How then, can investors be plunging in with such gusto, when historically we have absolutely no comparison to guide our investment actions? It’s certainly the million-dollar question.

I can only suggest that the last 10 years of bull market has created a classic conditioned response. For all the new investors who began just after the GFC, “buy on the dip” became the mantra. And overall, this strategy has worked extremely well.  Now add to the sudden penchant for index investments which simplifies the act of investment no end, and you can probably go close to understanding the reason for the steep uplift after crash.

But bear markets don’t end in a ‘V’ shape.

So once clear and precise numbers start to become public, market participants will begin to critically evaluate company fortunes and no doubt these numbers will reveal the true extent of economic weakness.

Remember, professional money managers, make up the great majority of market participants and can very easily move a market en masse depending on their views. When reporting season begins, companies will reveal an accurate picture of their current and future financial position. And one doesn’t need to be Warren Buffett to imagine that these figures are certainly not going to be a very ‘rosy’ set of numbers.

It will be at this juncture that their trading computers will suddenly ‘whir’ into action and send a shudder through markets. And at that point, many retail investors, totally convinced of the value of their index funds, will suddenly be learning a very valuable lesson in the art of long term investment.

bull and bear markets

Therefore my advice currently is to at least tread lightly with any new investment. Be cautious of what is around the corner as it seems to me we are certainly not 100% out of the woods yet. In fact, I suggest we are probably only 30% out of the woods at the moment, with plenty of opportunities for catalysts during the next 12 months to puncture optimism and send markets into a rather steep tailspin.

So keep some cash on the sidelines because if we get a decent fall, then this will be a great time to buy. But remember, if we do enter a bear market phase, which is pretty likely, it will no doubt go for at least 12 – 18 months.

And it will certainly be a test of your strength as an investor to stay in and remain on course. It is always bear markets that shake the last remnants of the retail investors back to the sidelines – which is the last place you want to be just before the market takes off again!

Thanks for reading, share it around and see you next time. Homepage

Postscript: 6 August 2020 There’s certainly plenty of opinions online regarding the stupidity of this rally considering the economic environment surrounding the globe. So after another big Dow rise, here’s just one example from CNBC commentator Jim Cramer.

Now there’s plenty more to reference, but just taking the time to think rationally about the indisputable nexus between economic wellbeing and sharemarkets must lead any investor to the conclusion that there’s absolutely no metrics underpinning this rally. It is, in fact, a house of cards, just waiting on that random gust of wind to bring it down!

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