Is This A Bear Market?

Most people who have called themselves bears over the last couple of years had a pretty simple equation to justify their bearishness – High Present Valuations = Low Future Returns. And today’s valuations – the valuations of two years ago – were so high that future returns would be very low and probably, possibly, at some point, negative. The argument was that stock prices were too high to justify the risk of owning a normal allocation, say 60% of the portfolio for the typical moderate risk investor. I made that valuation argument myself in one of these weekly missives in the middle of 2013 so I’ve taken even more flak than the average bear. It has not been a pleasant two years for the bears to say the least.

If you define a bear market by the size of the decline, what we’ve seen so far does not qualify. Indeed, what the stock market has done this year, as volatile as it has been, only briefly qualified as a correction, a drop of 10%, and now doesn’t even do that term justice. Of course, these things are not confined by the calendar and if you measure from the peak last May the S&P 500 is down just over 10%. As you move away from the US blue chips the damage gets larger; the equal weight version of the S&P 500 is down over 13%. The Russell 2000 small cap index is in full blow bear territory, down just over 20% since peaking last June. The EAFE international index is almost there, down 18% since last May and about the same since it first peaked in June of 2014.

The definition of a correction as down 10% and a bear market as down 20% though are just arbitrary numbers agreed upon by no one and everyone. And those thresholds, despite recent history, are met quite frequently. 10% corrections come around every couple of years and most of them are over before most investors get a statement that might scare them into doing something stupid. 20% bear markets are also pretty routine, coming along roughly 1 year out of 4. Corrections and bear markets are generally over pretty quickly, even the ones that turn into financial crises. The 2008 bear market, from peak to trough, lasted 17 months; it only felt like a lifetime.