I have been busy researching information on bear markets trying to determine if you can actually predict them prior to their arrival. In looking at the past bear markets, I have found that there are some common signals that occur before the coming of a bear market. The findings were a little eerie because many of these characteristics were present prior to this recent market downturn.
- Investors become more optimistic as prices increase
- New stock issues flood the market
- Investors start to become more speculative
- Business indicators are booming
- High or increasing inflation
- High or rising interest rates
- Declining or stagnant corporate profits
- Political instability or international conflict
- High unemployment
- A tight monetary policy
The biggest problem
If these characteristics commonly exist prior to a bear market, then why can't we see it coming ahead of time and react accordingly? Let's face facts, these characteristics were not only present in early 2000 but they were there in 1999 and 1998. If you tried to time the markets and you got out of high flying tech stocks too early, you missed out on a lot of good returns.
Most investors, and professionals, are afraid to get out of a bull market for fear of missing out on ‘big profits' at the top of the market. In simple terms, this is known as greed.
Imperfection is a reality
Without a doubt, it is much easier to see the bear market coming after it has already happened. The unfortunate part about this is no one can accurately predict the future. More importantly, no one can accurately time the arrival of the transition of a bull market to a bear market. Although we wish that perfection exists in the industry, it does not.
Good news ahead
I hate to sound like a motivational speaker where everything in the world is made to look like sunshine and blue skies but I think there is some room for some positive comments. Instead we see and hear all the negativity on the economy and market conditions.
The good news is that the bear market has changed our environment dramatically. In fact, we are now starting to see declining interest rates, controlled inflation, more rationalism in stock acquisition, and much more attractive stock valuations.
I will add a few other reasons of my own why I think this might be one of the best buying opportunities I have seen in 10 years:
- There is always sunshine after the rain.
- Markets go up more than twice as often and twice as much as markets go down.
- Bear markets are essential to economic health.
- Bear markets put stocks back into the hands of their rightful owners.
While I may be one of the few with an optimistic outlook of the future I remind myself everyday a line from one of the greatest investors of all time. Sir John Templeton said “you should always sell at the height of optimism and buy at the height of pessimism.”
In the end, the lesson is simple – do not try to time the markets and be patient because the sun will shine again.