Welcome to the first Gen Z bear market

Gen Z investors are experiencing their first bear market, and that’s a good thing.

I am referring to investors who were born after 1996 and are currently 26 years old or younger. They would have been no more than 12 years old during the last big bear market, in 2008, and they almost certainly weren’t paying attention to Wall Street. (I am bracketing the cascading drop in February and March 2020, in the initial weeks of the pandemic, which, at only 33 days long, was not a normal bear market.)

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So this means that, until recently, Gen Z investors’ only stock investing experience was that stocks almost always rose. And that led to alarming levels of overconfidence, with dangerous consequences both for their own portfolios and for the stock market as a whole.

The recent stock market crash has certainly reduced that overconfidence, if not eliminated it altogether. Take a look at the accompanying chart, which reports the performance of the 100 stocks that are mostly held by Gen Z investors, based on analysis by Apex Fintech Solutions. On average, I estimate, these stocks are down 43% from their 52-week highs and showing a 25% loss year-to-date. (Performance data, according to FactSet, is through May 10.) A bear market is traditionally defined as a loss of at least 20%.

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I hasten to add that in saying it’s a good thing Gen Z is experiencing their first bear market, I’m not motivated by the condescending judgment of some retirees and near-retirees that these young investors are getting what they deserve. There is no room for such an attitude as all of us, at one time or another, have gone through a similar and painful process of becoming older and wiser by experiencing a bear market. Can you say internet bubble or, before that, 1987 Crash or, even before that, Nifty Fifty and the 1973-74 bear market?

Instead, the reason it’s good to experience a bear market is that young investors’ overconfidence becomes increasingly dangerous the longer it takes them to experience their first bear market. If it takes too long, the arrogance of these investors will lead them to invest far more than they can afford to lose, and thus lose intolerable amounts when the market finally turns, as it inevitably will, sooner or later.

The same logic is behind the hope expressed by casino veterans to those starting to gamble for the first time: that they had better experience a big loss sooner rather than later. This is one reason Josh Brown of TheReformedBroker.com said Gen Z’s recent big losses “will prove to have been a good thing.” In the latest episode of his show “What are your thoughts?” broadcast, he said that, after experiencing their losses, Gen Zers “will never again treat your money the way they treated it in 2021, ever again.”

That’s good for another reason too. Bear markets teach us to appreciate valuations and risk, and that appreciation in turn supports the market as an efficient engine of economic growth, capital allocation, and innovation. If the stock market always went up, then the riskiest, craziest, least deserving startups would gradually absorb most of the equity financing.

children’s markets

Adam Smith’s classic book from the 1960s, “The Money Game,” has one of the best descriptions of this recurring cycle in which each new generation, until they finally experience a bear market, scoff at older investors. for being old and risk-averse. -fashionable You may recall that, in April 2020, Warren Buffett was prominently mocked for being “old” and “washed out”; that time he had passed.

Smith used the phrase “kids markets” to describe environments where this attitude is widespread among the younger generation. He wrote of a friend of his on Wall Street named The Great Winfield, who during the children’s markets only hired investment managers who were not yet 30 years old: “The strength of my children is that they are too young to remember anything bad, and they are earning money. so much money that they feel invincible. Now you know and I know that one day the orchestra will stop playing and the wind will rattle through the broken glass of the windows, and the anticipation of this freezes. [the rest of] us” who are old enough to remember.

The Great Winfield adds that “memory can get in the way” in a children’s market. When caution fades, as it largely did in late 2020 and early 2021, those who have lived through a bear market have a “malaise that comes with the feeling of déjà vu that instantly wears off.” : We’ve all been here before.”

Smith’s larger point: “You can’t stop the flow of the seasons.”

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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