Stock investors have a lot more to do before the bear market takes its last breath.
According to the five stages of bear market grief, which I addressed in mid-May, we are currently in stage three. That leaves stages four and five to suffer; unfortunately, these are the most painful.
To summarize, the five stages of bear market grief have parallels to the five stages of grief introduced by the late Swiss-American psychiatrist Elisabeth Kübler-Ross:
Judging where the stock market stands in this five-stage process is not an exact science. Investors may be further ahead or further behind. In mid-May, it was still possible to deny the existence of the bear market, for example, as the S&P 500 SPX,
it had not yet fallen 20% from its all-time high.
Most investors have passed stages one and two. It has been six weeks since the S&P 500 met the bear market criteria and investors’ focus has shifted to survival mode. This brings us to the third stage, when (as I wrote in mid-May), “investors redirect their energies to find out if they can maintain their lifestyle despite the portfolio decline; retirees readjust their financial plans to see how they can avoid outliving their money.”
Consider a Ryan Detrick’s recent tweet, the insightful chief market strategist for the Carson Group. He noted that since 1982, the stock market has fully recovered from bear markets in five months or less if losses were less than 30%. Given that the S&P 500 at its mid-June low was 24% below its all-time high, this stat appears to be welcome news, suggesting that stocks may return to new all-time high territory later in the year.
In other words, this bear market isn’t so bad after all, as long as your loss doesn’t exceed 30%. This is a classic “negotiation” perspective. As Kübler-Ross pointed out, in the negotiation stage we try to regain control of a situation by exploring endless “what if” and “if only” statements. However, trying to control a bear market is laughable. As she argued, this stage is in effect nothing more than a defense against pain.
There are not just psychological reasons why we shouldn’t take too much comfort in the rapid recoveries from the shallowest bear markets of the last four decades – a sample that, by Detrick’s calculation, contains only four examples. Some questions:
Why choose 1982 as the cutoff point? Unless there are strong theoretical or statistical reasons to do so, it’s a red flag when you’re targeting only a small subset of a larger database. A very different picture emerges from the bear market from September 1976 to March 1978, for example. During it, the S&P 500 lost 19% but, according to Detrick, it took 17 months to recover that loss. Factoring in inflation, the recovery took much longer: According to my calculations of the S&P 500’s inflation-adjusted yield and dividends, it took the stock market nearly four years to climb out of the hole created by that 1976-78 bear market.
Shouldn’t the Federal Reserve be credited for helping the stock market recover quickly? Take the February-March 2020 bear market, for example, which far exceeded the 30% stop loss threshold. However, the full recovery took only five months, and the Fed’s extraordinary stimulus deserves most of the credit. In fact, one could argue that the dominant factor behind this rapid recovery is the Fed, rather than the magnitude of the previous bear market loss. This possibility is especially important to consider now, as far from easing monetary conditions, the Fed is removing the punch bowl.
The bottom line? Historical data can be sliced and diced in many different ways to support predetermined conclusions. I am reminded of Adlai Stevenson, the Democratic candidate for US President in the 1952 and 1956 elections: mocking his opponents, he was supposed to say, “Here is the conclusion on which I will base my facts.”
None of this means that the stock market cannot stage a strong rally in the coming weeks. But if my analysis hits the mark, keep an eye out for the final two stages of bear market pain (trough and acceptance) before a new major bull market can begin.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be contacted at email@example.com