3 Lessons for the Next Bear Market … Or ANY Market

by James Brumley | March 7, 2014 12:33 pm

If you’re like most investors, five years ago (almost to the day) you were terrified by the headlines you were reading. And understandably so. We were sitting in the shadow of a 50%-plus loss in the market’s value at the time, with no apparent end in sight. The headlines were nothing less than horrifying, and it wasn’t unusual to hear people swear off stocks forever.

It was a big mistake, of course. Now five years removed from the pinnacle of that fear, the S&P 500 has advanced a stunning 175% off of its March 9, 2009, low.

Most investors missed more than a little bit of that run-up, skeptical of being burned by a doomed rally. Indeed, a handful of investors missed the entire bull market, certain that the United States never actually made it out of the recession.

Regardless of when and where you stepped into the long-term, cyclical rally, the boom-to-bust-to-boom phenomenon might offer some critical guidance for investors now, as whispers of the end of the bull market are getting a little louder.

In fact, there are three specific lessons all of us may want to keep in mind now that the bull market, at the five-year mark, is officially long in the tooth.

1. The Media’s Favorite Pundits Can Be Wrong … Badly

Just because a forecaster or highly touted stock-picker is on television doesn’t make him or her right. Some of the very biggest names in the prediction business were amazingly bearish when they should have been wildly bullish.

For instance:

“If you take a macro approach, earnings per share of S&P 500 firms will be – quite realistically in 2009 – in the $50 to $60 range…. most likely, we can brace ourselves for new lows on U.S. and global equities in the next 12 to 18 months.”
– Nouriel Roubini, from a Forbes column posted on 3/12/09[1]

As it turns out, the ultimate bottom had already been hit — three days before Roubini made his bearish case, in fact. He actually was right about earnings; the S&P 500 only earned $56.86 in 2009. But, by March of that year, enough investors saw a light at the end of the tunnel to kick-start the market’s recovery.

It wasn’t just Roubini, though:

“My long-term opinion is that the bear market has several years left to run, and stock prices will go a lot lower. … So any rally that happens is going to be a bear market rally.”
– Robert Prechter, of Elliott Wave International, in a Reuters interview from 2/27/09[2]

And plenty more amazingly bad market calls can be found.

2. Stick to Stocks You Don’t Mind Being Stuck With

Admittedly, it’s a tad trite for Warren Buffett to spew his personal “buy and hold forever” investment philosophy to the average investor. He earns more in dividends in one week than most people earn in a lifetime, regardless of the ups and downs of the value of his principal. He’ll never have to worry about the market’s major ebbs and flows because he can afford to hold them forever.

The typical investor, however, will eventually need to sell his or her stocks to, you know, live on.

Nevertheless, he’s right about one thing — you should only buy something that you’d be perfectly happy to hold if the stock market shut down for 10 years, because that’s how long it could take a particular company to prove its value to the market. Any shorter time frame, and the market’s inherent volatility has too much of a chance to unfairly drag a stock’s price lower.

3. Keep Calm and Carry On

Since 1900, the United States stock markets have experienced 23 bear markets. And the stock markets recovered from exactly 100% of them.

“But,” you say, “the next one is going to be the one that’s different than the rest, with a recovery only materializing years after the meltdown, and then only after a complete collapse of the global financial system!”

Yeah, the same thing was being said at some point during each of the prior 23 bear markets as well, and not one of those dire predictions ever actually came true.

Reality: While no investor particularly cares to see stocks retreat into a bear market, panicking at the first sight of one doesn’t help an individual make wise decisions. By accepting and even embracing the market’s never-ending bull/bear cycles, traders can remain emotionally prepared to make smart decisions at major tops as well as major bottoms.

One cautionary note regarding the “keep calm” lesson: The financial media won’t make it easy for you to do this, be it a bull market or a bear market.

Money-centric news television and all of its usual gurus tend not to think cyclically, even though the market is highly cyclical. Getting a good feel for where the market is within its usual cycle might actually require absorbing less day-to-day financial news coverage, and taking more of a holistic look at things like slowing earnings growth and waning economic trends.

It could, and should, take a few months to come to such longer-term conclusions.

Bottom Line

Whether the stock market is poised to make a major top and start a new bear market exactly five years after the current bull market began remains to be seen. The economic data doesn’t suggest that’s what’s in the cards — the S&P 500 is projected to increase its bottom line by 12.3% this year, and by 14% next year, while most pundits remain bullish.

Then again, most of those same pros and analysts didn’t see 2008’s implosion coming in 2007 … at least not until it was too late.

Thing is, if you have a plan, the proper perspective, and the right stocks, the next bear market won’t have to be a life-changing catastrophe.

  1. Forbes column posted on 3/12/09: http://www.forbes.com/2009/03/11/recession-depression-bear-market-equities-opinions-columnists-nouriel-roubini.html
  2. in a Reuters interview from 2/27/09: http://www.reuters.com/article/2009/02/27/us-usa-markets-bearmarket-sb-idUSTRE51Q48420090227

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