When asked what the stock market would do, the old-time financier said, 'It will fluctuate." This is clearly what happens over time. The market fooled many people, however, from around 1983 to 2000, as it tended to rise in a straight line with only minor dips and flat spots. Many who invested in the dot.com bubble in the late 1990s had no experience with a market that declined and were very surprised when it did just that, beginning in Clinton's last year.
Even though the stock market rise in recent years has been shorter than the 17-year bull market of Reagan, Bush Senior, and Clinton, it still has apparently fooled some into thinking it would rise forever. Now many are panicking and selling out when most indicators are bullish.
Bear markets have root causes, of which there are five according to analysts such as Bob Brinker and others.
First, high inflation. Inflation is relatively low and stable now. One strike against a bear market.
Second, rising interest rates. Interest rates on high-grade securities have been declining. Two strikes.
Third, tight money. The fed has eased and is poised to ease further. Strike three.
(Just to be fair, we'll give the bear two more pitches.)
Fourth, rapid growth. The economy has, in fact, grown well until the past couple quarters, but the growth was not overheatedly spectacular, just nicely sustainable, and the current slowing of growth paradoxically mitigates against a bear market. Strike four!
High stock valuation. The PE ratio, one might recall, during the dot.com bubble, was, in some sectors, in the 80s and 100s. We're now running a reasonable 16-17, give or take minor fluctuations. Strike five! The bear is out!
Probably. Nothing is ever absolutely certain.
One notes additional indicators:
1) The Arms (TRIN) index is 1.87, a markedly bullish level.
2) The Put-Call ratio remains bullish. This is based on the contrarian observation that, when more people are bearish and believe the market will decline, it is more likely to rise.
Lastly, one cannot always count on history repeating itself. The likelihood, however, is that certain patterns will repeat as they have done so in the past. Right now we have a number of the bad news bears predicting recession and advising that one buy gold and commodities. One notes there was similar advice in the early 1980s. Gold did peak in 1980
, but then declined and the stock market began its greatest bull run ever in 1983. Gold is now at a historic high. One notes multiple ads on the radio selling gold now. Do you not consider that, if the sellers thought gold was going to boom, they would not be selling gold now? Think contrarian. When everyone is trying to sell you gold, don't buy it. Now is the time to sell gold and buy stocks, history suggests. Contrarywise, when the equity market peaks and gold prices are down, you might want to pick up some gold or other commodity stocks.
Regarding those predicting a bear market and recession, I recall they have predicted five out of the last zero bear markets. Not one of their last five predictions has proved correct. That is also history worth noting. It is true, of course, that a bear market will arrive some day, and that anyone predicting a bear market can then just claim to have been 10 or 20 years ahead of their time . Unfortunately, that excuse doesn't help anyone make money in the stock market. If you are many years out of sync, even if your theory is correct, you are selling stocks in a rising market and vice versa. You will go broke.
I'm going out on a limb and state that we are near the bottom of a market "correction," a transient decline in a bull market cycle. From here, we mostly go up for a while. Being responsible for myself and my future, I'm taking the risk that I COULD be wrong and I'm adding to equity holdings now. We'll see. The only certainty is, as the old-time financier said, "It will fluctuate."--J. P. Morgan