But unfortunately, this slide doesn’t seem to be the devil as we know it.
Leo Grohowski, chief investment officer at BNY Mellon Wealth Management, said these market participants have never experienced periods of high inflation and high interest rates, and sudden changes in the economic environment are exacerbating market volatility.
“What we’re seeing is investors with ample liquidity being pushed out. They bought first and asked meme stocks, SPACs, NFTs, a lot of what I would call indiscriminate buying. Now we’re seeing some indiscriminate buying sales,” he said.
Joshua Brown, co-founder and CEO of Ritholtz Wealth Management, said in a recent blog post that most investors are not prepared for this trading environment. “It’s one of the most dangerous environments I’ve ever seen, and I’m dealing with dot com crashes, 9/11, Enron and Tyco, WorldCom and Lehman,” and many other crises.
As Berkshire Hathaway’s Charlie Munger put it at the company’s most recent shareholder meeting, the stock market has “almost turned into a speculative frenzy.” He added, “We have people who know nothing about stocks and are advised by stockbrokers who know even less.”
Still, with the market teetering near a bear market — when a major index is down 20% or more from a recent high — some technical analysts don’t think there’s too much to worry about. These three charts show why it might not be the time to hit the panic button. At least not yet.
Bull markets pay more than bear markets lose
According to S&P Dow Jones Indices, the 14 bull markets since 1932 have averaged 175% returns, while the 14 bear markets since 1929 have averaged 39% losses.
Downturns are also much shorter than bull markets: Bear markets have occurred on average every 56 months, or about four and a half years, since 1932, according to S&P. But they also last about a year on average, making them much shorter than corresponding bull markets.
If we do avoid a recession, there could be a big rebound, said Liz Young, director of investment strategy at SoFi.
Since the 1970s, the S&P 500 has lost more than 10% without a recession, and the stock market has soared in the weeks following the decline. Markets trade today as if they were already pricing in a recession — so if the Fed can arrange a soft landing, the payoff could be substantial.
Historically, sustained declines have not been a terrible entry point
The S&P 500 and Nasdaq Composite entered their seventh straight week of losses on Friday. It was the longest consecutive period of market volatility for the S&P and Nasdaq since 2001 and 2002, respectively.
But previous returns are no predictor of future performance, and recovery from a prolonged S&P decline is usually positive. When analyzing the streak of losses over the past 6 weeks, the average return after one year is over 10%.
“Now could be a good time to bet on the market short-term,” wrote Rocky White, senior quant analyst at Schaeffer’s Investment Services, noting that in the four weeks following a losing streak, the S&P has gained 1.57%. On average, it exceeds the typical return of 0.67%.
“When you go away a year, there’s not much of a difference in returns, so long-term buy-and-hold investors have no reason to panic,” White added.
Volatility is not obvious
By then, we may be approaching a bear market, but we are not panicking. Even with the S&P 500 down nearly 20% from its highs, volatility is still below its May peak.
“When you look at the VIX [VIX] From a historical perspective, it’s not as high as you might expect given the uncertainty we have right now,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
The VIX, widely known as Wall Street’s fear gauge, is well below levels seen during the previous two recessions. “We’re seeing a better mix of bulls and bears than in the past, which is a good sign that the market is looking for support,” Silverblatt said.
Now the market is going through a kind of rolling capitulation, said BNY Mellon’s Grohowski.
“If you’re lucky enough to have some cash to invest,” Grohowski said, “I think waiting for the magical surrender day may prove to be a missed opportunity.”