But sadly, this losing streak doesn’t seem to be the devil we know it to be.
These market players have never experienced a period of high inflation and high interest rates, and the sudden change in the economic environment adds to the market turmoil, said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management.
“What we’re seeing is a weeding out of investors who were awash in liquidity. First they bought and asked questions with meme stocks, SPACs, NFTs, there was a lot of what I call a fire buy. And now we’re seeing some fire sell,” said.
Most investors are unprepared for this trading environment, said Joshua Brown, co-founder and CEO of Ritholtz Wealth Management, in a recent blog post. “This is one of the most treacherous environments I’ve ever seen, and I operated through the dot-com crash, 9/11, Enron and Tyco and WorldCom and Lehman,” and a host of other crises.
As Berkshire Hathaway’s Charlie Munger said during the company’s recent shareholder meeting, the stock market has become “almost a speculation mania.” He added that “we have people who know nothing about stocks being advised by brokers who know even less.”
Still, as markets flirt with bear territory, when a major index falls 20% or more from a recent high, some technical analysts don’t think there’s much to worry about. These three charts show why it may not be time to hit the panic button. At least not yet.
Bull markets give back more than bear markets lose
The 14 bull markets since 1932 have had an average return of 175%, while the 14 bear markets since 1929 have resulted in an average loss of 39%, according to data from S&P Dow Jones Indices.
Recessions are also much shorter than bull markets: Since 1932, bear markets have occurred, on average, every 56 months, or about four and a half years, according to the S&P. But they also last about a year on average, making them much shorter than the corresponding bullfights.
If we avoid a recession, said Liz Young, chief investment strategist at SoFi, there could be a big recovery.
In periods since the 1970s, when the S&P 500 fell more than 10% without a recession, stocks soared within weeks of the decline. Today, markets are trading as if they are already pricing in a recession, so if the Fed can orchestrate a soft landing, the returns could be significant.
Sustained reductions are not a terrible entry point, historically speaking
The S&P 500 and the Nasdaq Composite entered week seven of sustained losses this Friday. That’s the longest consecutive period of market turmoil since 2001 and 2002 for the S&P and Nasdaq, respectively.
But past returns don’t predict future performance, and recoveries from long losing streaks in the S&P are often positive. Looking at 6-week losing streaks from the past, there has been an average return of over 10% after a year.
“Now might be a good time to make a short bet on the market,” wrote Rocky White, senior quantitative analyst at Schaeffer’s Investment Services, noting that in the four weeks after a losing streak, the S&P gained 1 .57% on average, beating the typical return of 0.67%.
“When you get down to a year, there’s not much of a difference in returns, so long-term buy-and-hold investors have no reason to panic,” White added.
Volatility is not noticeable
At that point, we may be approaching a bear market, but we are not panicking. Even as the S&P 500 falls nearly 20% from its highs, volatility remains below its May high.
“When you look at the volatility index [VIX] from a historical perspective, it’s not as high as might be anticipated, given the amount of uncertainty we have right now,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
The volatility index, widely known as Wall Street’s gauge of fear, is much lower than it was during the previous two recessions. “We are seeing a better mix of bulls and bears than in the past,” Silverblatt said, a good sign that the market is looking to find its support level.
What markets are experiencing now is a type of continued capitulation, BNY Mellon’s Grohowski said.
“If you’re lucky enough to have some cash to invest,” Grohowski said, “I think waiting for the magic day of capitulation may be a missed opportunity.”