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Market Commentary: Staring at the Bear

Written by: Benjamin Bimson CIMA®, CMT® / CIO, BCJ Financial Group

Fear is a powerful motivator. And this week we all came face to face with a bear.

I was reminded this week of a camping trip in Lake Tahoe my family and I took a couple of year ago. Just prior to mid-morning, coming out of our trailer with my wife and daughter, I was met by a teenage bear only about 10 feet away, walking towards me. I yelled at my wife and daughter to get back inside and shut the door. Though I was yelling at the bear, he took a few more steps towards me. I had no idea how close he would get or if he would stop, but I wanted to give my family time to get inside.

Thankfully, he did finally stop, turn around and saunter off. I’d love to say that I fearlessly stood my ground and that was the result of well-calculated and deep-rooted experience. I was afraid though. I didn’t want to get close to the bear. I would have surely lost badly.

Sometimes fear shows up unexpectedly and we have no idea how it will work itself out.

For over a month since Coronavirus was discovered, we have largely shrugged off the biggest risks. None of us knew how things would play out, and despite knowing that it could get worse, history has taught us that normally these things are transient. Is that still true?

To say that we know how this will all play out is impossible. It could get worse. It could get better. It could remain in uncertainty for days, weeks or even months. All we have is past similar experiences where markets have declined rapidly over a very short timeframe. In those cases, when we were not in a bear market already, recoveries tended to come fairly quickly.

It is remarkable how fast fear can come and go.

Ned Davis Research put together the following table that shows how fast recoveries have tended to come. History is never the same twice but there are still lessons we can learn. Reacting too strongly or too swiftly can sometime hurt more than help.

 

Copyright 2020 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved.
See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/.

 

Making decisions on long-term drivers

Considering the recent extraordinary, painful week in equity markets, it is important to re-examine the major thesis of what the long-term trend concepts that are driving markets looks like. After all, that is the framework we need to make decisions within. The trend concepts put some perspective on what might happen. These also tend to drive business and consumer behavior, which drive our economy and markets.

When shocks enter the market, they tend to lead to fear which naturally drives most decisions towards the fear of the least favorable concepts: in this case market slowdowns or worse, the next inevitable recession. Here is a list of trend concepts that are key themes for the next decade.*

  • Central banks will have difficulty achieving their inflation targets
  • Wage inflation to remain subdued
  • Yields to remain historically low
  • Unlikely to go another decade without a recession
  • Secular bull remains intact
  • Macro conditions continue to favor Growth over Value
  • Large-caps outperform until the end of the recession
  • Millennials and boomers make their marks on the economy and markets
  • No end in sight for spending on intellectual property
  • Digital currencies take over payment systems

 

Considering all data rather than how frightening it may feel in the moment, it is very important to always look at current conditions. Right now, technically, markets have entered a correction. However, the long-term bull has not been threatened, so far. We would only be in a bear market if we dropped another 10%. Short term, volatility is likely to be a trouble-maker and even intermediate-term market outlooks are uncertain, but long-term bullishness is still unchanged for now.

Neutral outlooks tend to be a little more defensive, but not to the point of the extreme defensiveness we would want if a bear market was becoming evident. While it is not impossible to enter a bear market from a top within weeks, normally they develop over more time.

Remaining focused on your overall strategy, and giving time for it to work is extremely helpful at this point. Overlaying feelings on investment management is almost always a bad solution.

It can still be frightening in the moment, but we have strategies and solutions to get through this time of uncertainty.

To our clients: We are here to yell at this bear for you!

 

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*Copyright 2019 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Right Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo

Investment advisory services are offered through BCJ Capital Management, LLC., an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein.  BCJ FG 20-24

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