Burglar or Bank Robber? Time to Watch Your Wallet and Stock Portfolio!

In an October 2021 article, we made the case for a new secular commodity bull market and concluded that this environment would likely spill back into the economy and stock market. That process is already underway, as the NASDAQ Composite was recently down 20% from its high, compared to a drop of 12% for the S&P 500. The former was heralded by the financial press as “entering bear market territory”, whereas the latter was deemed to be in “correction mode”. To us, this is a non-helpful and intellectually lazy way of defining corrections and bear markets. After all, most corrections are pretty-well over, or certainly more than half-way completed, by the time the magic 10% mark has been crossed, the same for bear markets. It would be more useful to know that the market had entered a correction close to the day it started than at the -10% mark. That’s impossible of course, but we think it’s possible to classify these unpleasant periods for investors using a different approach.

The Magnitude and Duration of a Bear Market Depends on the Direction of the Secular Trend

Chart 1 features a slide from our 2022 Pring Turner client event. The green and red arrows flag the five secular or very long-term trends that have developed since the 1950’s. The smaller pink shaded ellipses indicate mini-bear markets, which are induced by a relatively short and mild recession. The larger ones zero in on more lengthy and deep recessions. The blue ellipses reflect economic slowdowns, where the growth path of the economy slows but never contracts in a meaningful way, as it does during a recession. Even so, equities typically experience a 10-20% sell-off in anticipation a slowdown. It is evident that the large ellipses are also associated with secular bears, where structural economic and financial imbalances abound. We call these “bank robbers” because they result in a devastating 40-60% loss over an extended 18-month or so period.

Chart 1 Burglars versus Bank Robbers and the Secular Trend

Cyclical bear markets that develop in secular bull markets are painful but contained, not so for secular bears.

On the other hand, a string of small ellipses, which we call “burglars”, due to the fact they are more of a temporary irritant to portfolio growth prospects, act in a similar way as a pit stop during a car race. Both represent a shorter-term setback that allows for refueling before extending the journey. The pit stop allows the car to finish the race in better shape. In a similar vein the digestion of gains that takes place during a burglar allows both the market and the economy to catch their breath and re-energize, thereby enabling an extension to the secular uptrend. Burglars occasionally result in a sharp 25% drop, as in 1962, and 2020. 1987 was a 35% decline. Mercifully, these “magnitude” bears are brief. More often though, burglars take the form of a milder markdown, but exert their pain in the form of a confusing, multi-month trading range, like 2015-2016. We call them “duration” burglars.

Evidence of a Bear Market