We are in a bear market. It started around New Years and there were warnings signs last year that one was likely to begin this year, but every bear market is different and this one has been an unusual one. It’s been going on much more slowly than I expected. However, all bear markets typically have three psychological phases to them. The first phase is marked by denial, with most people thinking that the market is either in a simple correction or that the Federal Reserve will do something to make things “return to normal.” Since 2009 every single time the stock market fell 20% or more the Fed either began a new QE program or lowered interest rates and the market quickly rallied back up to highs. Even when it crashed in March of 2020 it came back fast.
So, one of the phrases you heard for much of this year was talk of a “Fed pivot” that would make everything the way it used to be.
Now no one, except a few hopeless ones the margin like Cathie Wood, believes in that anymore and everyone realizes that the Federal Reserve is more serious than they thought about raising interest rates to stop inflation. And everyone realizes that inflation is real and not some “transitory” fad – it’s a systemic issue.
The mental denial of the bear trend is over and so we are in the second phase, which is typified with ideas like this.
Tech is as bad as i have ever seen it. maybe worse— Jim Cramer (@jimcramer) September 22, 2022
Tech may have no mojo but we are really oversold so it may not be as easy to roll this market down..— Jim Cramer (@jimcramer) September 22, 2022
The investor psychology of the second phase is no longer denial, but one that accepts the fact that losses are happening and likely to keep coming, but brings with it the hope that things may not get that much worse. It brings with it the conviction to be “tough” and just ride things out until it ends.
That’s where the masses are at now.
The third and final phase of a bear market is the end when the losses keep growing enough that many people give up and sell in panic and fear of losing so much more money that they can’t take it anymore.
That doesn’t have to be a crash, but it can feel like one. The bear market that started in the year 2000 ended with a price low in July of 2002 that came after almost eight weeks of straight down days. The 2007 bear market did not end with the crash of 2008, but a month of straight selling in the spring of 2009.
My guess, for now, is that this one will end in the first half of next year when the Federal Reserve gets towards the end of this Fed tightening cycle. I’d look for gold to turn up before the stock market, perhaps before the end of this year. But we’ll see how this all unfolds. I talked about the markets yesterday with Jim Goddard of www.howestreet.com.