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Sunday, December 4, 2022

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Bad News is Good News

Bad News is Good News

One simple way to explain how markets function is rising prices attract buyers, and falling prices attract sellers. They might sound like opposite yet equivalent truths, but they’re not. Fear spreads quicker than greed, which is why bull markets can grind on for years, while bear markets often end quickly and in a panic. The chart below shows what I just described. Since 1950, there have been over 1800 52-week highs, and just ~300 52-week lows.

 

52-week lows tend to cluster, and right now that’s the environment we find ourselves in. The S&P 500 has experienced thirteen 52-week lows this year…

…which is more than we saw the entire last decade.

 

Losing money never feels good, but this current experience is particularly painful for a few reasons. Bonds are supposed to hold up well when stocks are in free fall. 2022 smashed those expectations into a million little pieces. The other troubling thing about this current episode is that the economic data has barely even begun to soften. What happens if/when earnings start to fall? What happens when unemployment picks up?

Normally when stocks are in a 25% drawdown, we’re already in a recession. It’s possible that the market has already discounted whatever is going to come, but most investors don’t think that way. They think things are going to get worse once the news does. And they may be right. We just can’t know until we know.

So the circumstances surrounding the current environment are unusual, but how the stock market is behaving is fairly ordinary. Going back to 1950, the market has been >20% below its high for 17% of the time. That’s almost one in five days.

 

 

Stocks go up over time, but they can experience brutal setbacks that make you question everything you once thought to be true. The key to harvesting that long-term return is patience, a strong stomach, and proper risk management, which can vary wildly from investor to investor.

We got into this and much more on this week’s The Compound and Friends with Bob Pisani, who has a new book that I can’t wait to read, and the amazingly talented Kyla Scanlon.

 
 
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