The real answer is that no one knows for sure. However, as Yahoo Finance recently pointed out, the October market decline historically often marks the end of bear markets.
As Stock Trader’s Almanac’s Jeffrey Hirsch recently noted:
“Not all indices have gone down on the same day for all bear markets, but the lion’s share, or should I say the bear’s share, bottomed out in October.”
October’s market decline has also regularly occurred before a midterm election, such as in 2022. As Deutsche Bank recently observed:
“There has not been a single negative return in the year after any of the 19 midterm elections since World War II.”
However, while there is certainly historical precedent to suggest that the October market decline may be in the offing, it is important to remember that there are “no doubt” in financial markets.
“History is a great guide, but it is not the Bible.” – Sam Stovall
It is unlikely that they are not included
After ten months of brutal declines in the markets, it’s no wonder why investors are looking for a sign that the sell-off may be over. As Bob Farrell once said:
“Bull markets are happier than bear markets.”
There is little doubt about the truth of that statement. However, while we can certainly hope that the October market low has bottomed out, there are reasons to expect this to be the case. At least not yet.
While the mainstream media continues to portray the current decline as a “bear market”, remains a “fixed” in the midst of a booming trend. Many reasons for that statement will explain whether the October market decline was just that.
The current decline in the market has only reversed the heavy extension above the 200-week moving average. That long-term moving average continues to define the dominant market trend from the 2009 lows. It also indicated an uptrend following previous bear market lows. Most importantly, the 50-week moving average has not crossed the 200-week, which represents every previous bear market and recession.
Most notably, many factors are now missing that coincided with every previous bear market cycle.
- The increase in unemployment
- Malfunction
- Bankruptcies
- Defaults
- The Fed cuts rates
- 2-year and 10-year Treasury yields fell
- Un-returning the production curve.
- Spiking credit spreads
Additionally, BofA recently published a checklist “sign” which previously signaled the decline of the bear market. Currently, only 2 of the 10 signs are registered.
While the market will have a sustained rally from the recent October lows, it is probably not the bottom of a bear market. In fact, there are many reasons to suspect that the market decline is coming in 2023.
Under Market 2023
As we move into 2023, the markets will be very converging. While valuations are still elevated by many measures, earnings are weakening, and profit margins are under inflationary pressure, a risk of equity repricing remains. Investors should remain cautious until the economy shows signs of recovery.
In particular, markets look to and from economic data, so it becomes a leading indicator of economic activity. However, the risk for investors is an economic recession in 2023, which is unlikely to be considered now.
As we mentioned earlier, any increase in the Fed funds rate takes between 9 and 12 months to affect the economy. At the same time, the economy is already slowing down, and assuming the Fed rises above its predicted target, a 4% increase in rates has yet to affect growth. If so, income growth will slow considerably.
But critically, the Fed does not operate in a vacuum. That rise in the dollar was accompanied by the sharpest increase in interest rates in history. Sharp increases in interest rates, especially in a debt-ridden economy, are problematic as debt service requirements and borrowing costs rise. Interest rates alone can destabilize the economy, but when combined with a rising dollar and inflation, the risks of market instability are greatly increased.
We suspect that the risk of a recession in 2023 is substantially higher than most economists expect. This is especially so when the impact of monetary policy lags is offset by economic weakness from weak consumer demand.
Navigation What Comes Next
As mentioned, the The biggest investment problem during the recession know that you are in one. Many signs suggest we could be headed for a recession next year, but unfortunately, we won’t know for sure until after the fact.
Therefore, we must respond to market warnings and take action to prepare for a downturn. That said, the most important thing is not what steps to take but what behaviors to avoid. During market downturns, our emotional and behavioral biases tend to hurt our financial results the most.
“hate to lose” According to a recent study by the CFA Institute, it is one of the leading factors influencing investment decisions.
“Loss anxiety is a trend in behavioral finance where investors are so afraid of losses that they focus on trying to avoid a loss rather than making gains.. The more losses a person experiences, the more likely they are to become prone to loss aversion.“- Institute of Corporate Finance
Therefore, in order not to lose money in a recession, you should:
- Try to fix the time below.
- Don’t try to “day trade” the markets.
- Reduce leverage and speculative bets
- Avoid selling quality products just because they are discounted.
I agree with the Motley Fool’s conclusion:
“The bottom line is that, during a recession, it’s important to stay the course. It becomes a little more important to focus on top-quality companies in turbulent times, but, for the most part, you should be the same way you will approach investing next time. Buy quality companies or funds and hold onto them for as long as they last.”
Most importantly, you must distinguish between a “top-quality” company and one that is not.
