After going through a tough first few months of the year, June arrived with a glimmer of hope rising the stock investment markets. But inflation is still present and making a dent, and worse-than-expected data is causing a new collapse, which is why it is becoming difficult for us to understand this bear market. But not everything is as bad as it seems. These wild short-term swings are giving us very clear signs of where we are headed. In coalition with the words we analyzed from the strategists of Goldman Sachs, let's see what they have said about their analysis of past bear markets to understand what factors mark this bear market...
1. This bear market is cyclical.♻️
It is important to differentiate the type of bear market we currently have, given that mainly both its duration and the way in which the recovery will be carried out can vary. We can differentiate three types of bear markets; structural ones, those driven by geopolitical events or cyclical ones. Structural bear markets are typically the result of an economic imbalance or the correction of a major bubble, such as the 2008-2009 recession. Event-driven bear markets are caused by a one-time “shock,” such as a war, an oil price shock, or even a pandemic. And cyclical bear markets, like the current one, are often triggered by rising interest rates, impending recessions, and declines in profitability.
Bear markets and recoveries in the US since the 19th century. Source: Goldman Sachs Global Investment Research.
Structural bear markets have historically been the worst in terms of the depth of declines, their duration, and the time required for a recovery. The current one does not seem to be of this type. Cyclical bear markets usually fall by around 30%, last an average of two years and take about five years to show signs of recovery. Therefore, we have a long way to go…
2. Buy the dip? No thanks.
The recent summer rally led us to believe that we had hit the bottom of the bear market, and suddenly everyone rushed to fill their stock investment portfolios. Goldman strategists did not follow the masses, as they believe it is too early to think about a recovery. Market cycles follow different phases; despair, hope, growth and optimism. We are currently in the phase of hope. It usually lasts an average of 10 months and occurs when the market anticipates a decline in the business cycle and a rise in future earnings growth. Better to keep a cool mind waiting to see some signs that show us the path to recovery.
Psychology of market cycles. Source: BBVA Asset Management.
3. Everything indicates that we will have a hard landing.
If you still truly believe that it is time to buy the dip, remember that we have not yet discounted the full impact of interest rate increases on the economy. We do not know if the main regions of the world will avoid a recession, achieving what is known as a soft landing. To add fuel to the fire, the data is not in our favor... since World War II, 11 of the 14 cycles of declines were followed by a recession within two years.
History of success in cycles of interest rate increases in the US. Source: Goldman Sachs Global Investment Research.
These probabilities are reduced more in cycles where high inflation makes an appearance. In the context we currently find ourselves in, interest rate increases do not have the expected effect, given that inflationary pressures arise from problems with scarce supply and growing demand for products on a global scale. In both soft landing and hard landing scenarios, the scale and duration of falls tend to be deeper and more persistent in a hard landing.
4. There are four signs to look out for before a recovery.
In order to identify viable signs of a possible recovery, there are four signs that can guide us. These are cheap valuations in stock investing, economic slowdown, sky-high interest rates and inflation, and negative market sentiment. This entire bear market has been driven by fear of entering a recession. And while cheap stock investment valuations can be a viable signal, it's best to analyze them closely. It is also necessary that there be signs of improvement in the economy. We already know that markets move better in weak growth environments, although much better when growth is slow but strong.
Types of economic recoveries. Source: Brookings Institution.
Furthermore, the vast majority of bear markets bottom out between six and nine months before showing signs of recovery. We can see this in the profits of companies, only possible when a peak in interest rates and inflation is defined. And that certainly does not seem to be the case, given that the US Federal Reserve does not seem to be putting the brakes on interest rate increases. Not to mention the pressure exerted by the present Europe's energy crisis. It all depends on expectations and what is valued. A recovery is often preceded by extremes in investor positioning and sentiment: people need to expect the worst before they can start to be optimistic.
5. The next bull market is likely to be flatter and less profitable.
As we have seen, there are no good times for investing in stocks. Without interest rates boosting company valuations, investment returns will likely be weaker after the recovery period. That must be why Goldman strategists believe returns over the next decade will be in a broader trading range with lower returns. As we analyzed in a previous article, the winners of this decade will be companies with strong margins and good dividend distributions. Unlike the previous decade, which was marked by the growth companies in the technology sector.
What does this mean for stock investing?
Markets are constantly changing, this bear market we have today may look very different than those of previous times. But they help us to determine the market cycles to know how to act in each of them. For the moment, it would be advisable to continue improving our trading training or perfect our cryptocurrency training...