“If you can keep your head when all about you are losing theirs…
If you can wait and not be tired by waiting…
If you can think — and not make thoughts your aim…
If you can trust yourself when all men doubt you…
Yours is the Earth and everything that’s in it.”
-Rudyard Kipling (1895), quoted by Warren Buffett in 2017
PARADIGM SHIFT
Is A Bear Market Developing?
It’s no secret that US markets were rocked this past week by the reciprocal tariffs.
The S&P 500 ended the week down -9.08% from the previous Friday. On Thursday, it experienced its biggest single day drop since 2020.
Bear markets are technically defined by a 20% drop or more from recent market highs. And bear markets are especially painful because they generally last a good deal longer than simple pullbacks (-5% to -10%) and corrections (-10% to -20%).
For long-term investors (10+ years), bear markets don’t matter as much as they do for short- or intermediate-term investors (0-5 years or 5-10 years respectively).
Here’s the thing. It’s MORE expensive for a long-term investor to attempt to time a bear market and be wrong, than it is for a short-term investor to do the same thing and be wrong.
That’s because the long-term investor, when he or she is wrong, not only misses out on upside but also the future value of that missed upside compounded over time.
Chances of hitting bear market territory are uncomfortably high as of today. We’re only a few percentage points away now, and technically it could be called any day.
But I want to be a bit more nuanced.
I don’t believe we’re headed for a long, drawn-out bear market like 2001 or 2008. If we hit a bear market in the days ahead, I expect it to be more like the 2020 or 2022 bear markets.
The average bear market lasts about 10 months before hitting bottom and turning around. If this develops into a bear market, I don’t expect it will be longer than the average.
And right now, it appears we are nearing the height of uncertainty in global trade. While things could become even more uncertain, the likelihood is that companies and governments begin the adjustment, negotiation, restructuring and innovation period that reduces uncertainty as the year progresses.
However, it’s likely we still see heightened day-to-day movement over the next few weeks. The downward trend could easily continue for weeks and even months.
On January 31, I adjusted my own personal portfolio to protect against a good portion of the downside, in anticipation of a market correction which developed very soon afterward. While no one gets it correct all of the time, that call was pretty spot on. Month-to-date, I lost 1.94% while the S&P 500 lost 9.58%.
The hedge I placed was largely in response to the same reasons that led me to predict a coming 2025 market correction on December 9, 2024.
And that’s the sort of risk management that I teach in my courses and upcoming membership program which I hope to share with you as time progresses.