Today’s Stock Market — When Is a Bear Market Not a Bear Market?
--
Mainstream media’s recent reporting on the bear market in stocks has been either moronically simplistic or simply moronic. It’s hard to tell which.
Related
• 4 Lessons on When to Sell $400,000 Worth of Stock in an Unpredictable Market
• When Is a Stock Market Crash Not Really a Stock Market Crash?
• MBA Guide to Dealing with Higher Mortgage Interest Rates, Part 2 — How Much Money Will You Save?
Recent
• The Deafening Silence on Stock Buybacks from Centrist Democrats
• 2 Reasons Populations Are Collapsing in Developed Countries
• 3 Key Facts Everyone Is Missing About Biden’s Student Loan Debt Relief
Potential to Change the Way You Think
• Why Are Fundamental Human Values Critically Important for Successful, Enduring Brands?
• Life Expectancy vs. Healthcare Costs in the U.S. (and Japan, Germany, France, Spain, Portugal, etc.)
• (1a/9) “Top-Down” Makes More Sense Than “Left-Right” in the U.S.
Context matters. Nuance matters.
Neither context nor nuance has put in much of an appearance in recent media coverage about the stock markets.
Here is the roadmap for this article:
- Context and nuance. Qualitative: What do history and our experience tell us? Quantitative: What do the numbers tell us?
- Four stock charts of the S&P500 index to illustrate with pictures and numbers why context and nuance matter.
The 4 stock market charts for the S&P500 that we’re going to look at will change how you think about stock charts and commentary.
First, a quick recap on what the standard stock market reporting narrative has been. I’m going to primarily quote Saagar Enjeti from Breaking Points for a few reasons:
- For the past several months, he has been toeing the mainstream financial media party line on this “apocalyptic, world’s-gonna-end” narrative of the bear market that the S&P500 and other indices are either in already or are close to.
- Unlike other pundits, Saagar is actually open to learning. He has a track record of changing his stances and opinions when he learns new facts or when facts change. In other words, the guy has an open mind, and his ego doesn’t get in the way of course-correcting when it is warranted. I respect that. (I don’t expect better from people on corporate media outlets like CNBC, MSNBC, Fox Business, or CNN who are often either talking their book or getting all apocalyptic because it’s good for their ratings and advertising revenues. I do, however, expect better from Breaking Points and Saagar.)
- And — again unlike other pundits talking about the stock market — there are areas of punditry other than financial/markets news where Saagar is an outstanding performer. Financial news coverage, unfortunately, is not a zone of excellence for Breaking Points….at least, not yet.
So on both June 13, 2022 and June 14, 2023, Saagar started off the Breaking Points show calling the stock market “the most important issue in the country, there’s just no way around it” on June 13, and Krystal started off the show on June describing the markets as “falling off a cliff [on Monday, June 13].”
Au contraire, Saagar — there’s actually no way of getting TO your framing and narrative of the situation.
And Krystal — it’s simply incorrect to describe a 4% daily loss as “falling off a cliff.” There are times when the markets fall off a cliff, but a 4% loss isn’t one of them.
Let’s calm down. No one with any kind of a finance background is going to refer to a 3% or 4% drop on any given day as a a market “crash.”
The framing that is being used by Saagar — and now Krystal — is just plain wrong, and it misdirects people.
We will start with the definitions and understandings from finance professionals and people who are simply knowledgeable about financial markets:
- A stock market crash is when a broad index or many related indices experience rapid, double-digit declines. There is no specific percentage decline that precisely defines a stock market crash — unlike bull and bear markets — but participants generally know one when they see one. (Bankrate.com: https://www.bankrate.com/glossary/s/stock-market-crash/ )
- A stock market crash is a sudden dramatic decline of stock prices across a major cross-section of a stock market, resulting in a significant loss of paper wealth. (Wikipedia: https://en.wikipedia.org/wiki/Stock_market_crash )
- A stock market crash happens when there is a sudden, unanticipated and significant drop in stock prices. The fall is rapid and usually ignited by a single cataclysmic event that sets off a series of smaller events. (SeekingAlpha: https://seekingalpha.com/article/4482670-what-is-stock-market-crash )
All 3 definitions are similar. Key words and concepts get repeated:
- rapid, sudden, dramatic
- significant drop, “double-digit” declines, dramatic decline
- there’s usually a real sense of panic in the market when there is a crash (talk to people who were around on October 19, 1987 — most adults can tell you where they were on Black Monday and remember vividly the sense of panic that everyone was at least conscious of. Black Monday was a bona fide crash.)
So if we see a gradual 20% decline over, say, a 6 months period where you have a series of daily declines of 0.5% here and 1% there that somewhat outnumber the days where the markets go up, there’s a really good chance we will NOT look at that as a market CRASH. That’s because it was not rapid, sudden, or dramatic.
The other thing implicit in the concept of a crash is that it’s not a frequent occurance. How rare a drop in the market should be to qualify as a crash is open to reasonable debate, but we can put some common sense bounds on it:
- if it’s happening every month or even a couple times a year, then it’s probably not a crash; and
- if it only happens once in 40 years, then we might be using too high a threshold for what is considered a crash.
I downloaded historical S&P500 index pricing data going back to January 02, 1981– almost 41.5 years worth of daily price data to take a look for myself at how rare the 3.89% drop in the S&P500 on June 13, 2022 actually is.
Turns out that there have been 54 trading days in the 41.5 years since Jan 02, 1981 where the S&P500 dropped at least 3.89%. That means that — on average — the S&P500 dropped by 3.89% every 37 weeks (just over 9 months) or so. That’s certainly not every day, but it feels too frequent to me to be considered a crash.
No market — no honest market — only goes straight up.
On the surface, current financial news stories revolve around stock charts that look like the first one below.
It seems as though the S&P500 is in free fall and the world is coming to an end…..right?
CHART #1. The 12-month S&P500 DAILY chart, June 2021 to June 2022
In the above chart, we see that:
- the S&P has been gapping down each of the last 2 trading days; and
- the S&P has been closing at or near the lows of the day.
Neither of those is a good sign when you own stocks.
At its closing price today (06/13/2022) of 3,749.63, the S&P500 is about 22% below its most recent high. Since a drop of 20% or more is the generally understood definition of a bear market, this sure seems to fit. And hey, a bear market seems to mean thateverything is going down, so that feels like a good reason to be hyperventilating, no?
This up-and-down series of a few percent up, a few percent down in the stock market that goes down 22% over a 6 months period, by the way, is what our friend, Saagar Enjeti on Breaking Points has been calling “the stock market crash.”
I can’t count the number of times over the past several months where the markets open in the morning already down 2 or 3%, and he refers to the market as crashing that day.
That’s silly.
And after a certain point — which we passed months ago — it’s just tiresome to keep hearing misinformation like this.
A market CRASH is exceptionally rare and is exceptionally big.
For instance, Black Monday on October 19, 1987 when the Dow Jones Industrial Average dropped 22% in a single day was a legitimate crash. We will come back to this later.
There’s a different way of looking at this. Let’s dive in.
CHART #2. The 30-month S&P500 DAILY chart, December 2019 to June 2022
This 2nd chart goes back 30 months and gives us some interesting context and perspective. Things look a little bit different now, don’t they?
Here is what jumps out at me when I look at this chart:
- Yes, there has been a drop in the S&P over the past 5 months.
- However, in the context of the big runup in the stock market since Spring 2020 (when the Fed and the U.S. government started turbo-charging the financial markets here — ostensibly —to counteract the effects of the pandemic on the economy and the stock market), the drop over the past 5 months looks like it’s only corrective in nature. It’s not YET a major change in the larger trend.
- From the Spring 2020 low to the January 2022 high, the S&P500 more than DOUBLED, going from 2191.86 to 4818.62. That is a 120% increase in 22 months!
- Within the context of a 120% increase, a 22% decrease from recent peak that is only MILDLY CORRECTIVE so far. Seriously. It’s a pretty small pullback compared to the much larger increase across the entire S&P500 starting in the Spring of 2020.
- Even if I take the harshest possible interpretation of the numbers and say that the S&P500 gave back 49 percentage points of the 120 percentage points gained, that’s still a gain in the S&P of 1557.77 points from the 2020 low to today, or a 71% gain. A 71% gain over the 27 months from March 2020 to June 2022 still outperforms the long-term average gains in the stock market BY A LOT.
CHART #3. The 14-year S&P500 WEEKLY chart, mid-2008 to June 2022
Ok, let’s go longer-term. Let’s go all the way back to the 2008–2009 financial crisis and use a WEEKLY S&P500 chart this time. (See chart below.)
Here’s what jumps out at me on this weekly chart over the past 14 years:
- There’s a long-term, relatively narrow channel that the S&P500 has been trading within for almost all of the last 14 years. You see this at a glance.
- The S&P500 goes up and touches the top of the channel at least 5 or 6 times and goes down to the bottom of the channel and bounces off it at least 3 times.
- The S&P500 is right around the bottom of this channel NOW.
- It’s likely that the bottom of the channel will continue to provide some short-term or medium-term technical support to the S&P500.
- If the S&P500 does dip below the bottom of the channel, then I’d expect at the very least that it will come back up to the bottom of the lower side of the channel…and maybe it will make it back above that bottom as it did in the spring/summer of 2020. We will have to wait and see on that.
- Most importantly, the drop over the past 6 months — that everyone is hyperventilating over now — looks absolutely normal on a longer-term chart. Folks, look at what is inside that light green circle. There is NOTHING remarkable about it when you look at everything else going on in the previous 14 years in that channel.
CHART #4. 51-year S&P500 MONTHLY chart, mid-1971 to June 2022
Ok, let’s go really long-term — all the way back to the early 1970s with a MONTHLY S&P500 chart. (See chart below.)
Here’s what jumps out at me on this chart:
- You hardly notice the drop we’ve seen so far in 2022 in the S&P500 when you look at this long-term chart. It is entirely unremarkable.
- The only 3 bear markets that you really catch at a glance are: (1) the early 70s bear market from the Middle East Oil Embargo; (2) the Dot-Com bubble imploding in 2000–2002; and (3) the housing market/financial crisis of 2008–2009.
- Remember Black Monday when the Dow dropped 22% in a single day on October 19, 1987? That’s what a stock market crash looks like. Look for the light gray oval directly above 1988 on the chart below. That drop was essentially a one-day drop (although the Friday right before Black Monday was a significant down day, too.) If I didn’t point it out to you on this chart, you probably wouldn’t have looked at October 1987 as anything special, right? But it all happened in 1 or 2 days, and it was a 22% drop. By contrast, the other big bear markets in circles on this chart each lasted at least a couple years.
- The market downturn/correction so far in 2022 looks tiny compared to the other 3 major S&P500 bear markets of the last 50 years. Period. Full stop.
- The downturn in 2022 certainly has the potential to turn into something bigger, but we will have to wait and see.
When people in the mainstream financial media try to get you excited and worried and panicky with emotional, hyperbolic, apocalyptic language — but don’t present any recent context or historical context — it’s not helpful. Nor does it usually end up being correct when you look at the larger context.
Don’t be thrown off by it.
Go look at longer-term charts yourself and see if there is anything that looks exceptional to YOUR eyes.
Questions or comments? I’m interested in your thoughts and perspectives on this!
Related
• 4 Lessons on When to Sell $400,000 Worth of Stock in an Unpredictable Market
• When Is a Stock Market Crash Not Really a Stock Market Crash?
• MBA Guide to Dealing with Higher Mortgage Interest Rates, Part 2 — How Much Money Will You Save?
Recent
• The Deafening Silence on Stock Buybacks from Centrist Democrats
• 2 Reasons Populations Are Collapsing in Developed Countries
• 3 Key Facts Everyone Is Missing About Biden’s Student Loan Debt Relief
Potential to Change the Way You Think
• Why Are Fundamental Human Values Critically Important for Successful, Enduring Brands?
• Life Expectancy vs. Healthcare Costs in the U.S. (and Japan, Germany, France, Spain, Portugal, etc.)
• (1a/9) “Top-Down” Makes More Sense Than “Left-Right” in the U.S.
Want me to cover a topic? Please post suggestions in the comments, and I’ll use your input to help prioritize my writing and research.
If you appreciate my writing, please share it on social media.
Want unlimited access to all Medium articles? Become a member!
As always, thank you for reading, subscribing, clapping, and sharing — I appreciate you sharing your time and attention!
