I’ve gotten a lot of questions lately about whether I think we are entering into a bear market. The honest answer is I don’t know.
First, looking back in history, there are two types of bear markets:
- those that happen in a recession,
- and those that don’t.
Bear markets that happen in a recession are often deeper and the recovery is much longer. Those that happen simply because the market had gone “too far, too fast” tend to be “V”-shaped recoveries. Think 1987 or 1998.
Looking at the economy today, there is no true reason for a long-term bear market. The economy is in relatively good shape. And I don’t see a reason for a recession to begin anytime soon, absent some trigger event from Italy/Europe or China, or some Black Swan.
That means if we did have a bear market correction, I would actually expect it to be “V”-shaped and a very tradable exercise.
A 'Sector Rotation' Market
On the other hand, the market itself is showing signs of weakness.
My friend Dave Wright points out that even during the large upward movement on Monday, the stocks on the NYSE made more new lows than they made new highs. That is not a healthy market.
All that being said, much of the correction came in the tech sector, especially the S&P. Had you taken the technology stocks out of the S&P 500, we would’ve been in a downward market for quite some time. Technology clearly has led the way in recent times.
It is very possible that we get into a “sector rotation” market and that we churn sideways for quite some time.
It is just as possible that we see what normally bearish David Tice thinks will happen: that we are actually in danger of a market melt-up, which can happen for all manner of reasons.
Let me give you a potential.
Right now, the market and most commentators believe that Democrats will take the House in the midterm elections.
What happens if they don’t? Could we see the same type of bullishness in the markets and sentiment that developed after Trump was elected?
I know my Democratic friends want to ignore it, but so many sentiment indicators are at all-time highs. And they’ve been that way since Trump was elected.
Don’t ask me to tell you the reason or discuss politics with you, I’m simply looking at the facts. And I think we all agree that sentiment does drive markets.
But we need to remember that sentiment can turn on a dime.
My Advice for You
Now let me give you some really good advice that I am confident will make you a better investor.
One of the greatest investors of our times is Howard Marks of Oaktree Capital. He manages $122 billion and his quarterly letters are must-read. They are full of wisdom and insight.
He is one of my investment and thought heroes.
He has written a brilliant and extremely readable book called Mastering the Market Cycle: Getting the Odds on Your Side.
In interviews and other places, he basically says he thinks that 2018 is much like 2006. As he says, “Where we are in the market cycle shapes the probability distribution of returns that you face, and so it’s worth trying to figure out where we are.”
This is from a man who wrote his famous memo, “Race to the Bottom,” in 2007.
Whether you are a professional investment advisor or an individual investor, you really should get the book. It may very well be the most important thing you do for your investment portfolios this year.
I can’t say it any stronger than that. Other than to say, I wish I had written the book.
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Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.
John Mauldin is the chairman of Mauldin Economics, which publishes a growing number of investing resources, including both free and paid publications aimed at helping investors do better in today's challenging economy.
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