Is a Bear Market Imminent?

From the Baltimore Clubhouse – Are we on the cusp of a recession?

How about a bear market?

It’s nearly impossible to tell.

And anyone who says they know for certain is pulling your leg.

Now, recessions and bull markets are different things. But the two are definitely related. It usually takes a recession to turn a bull market into a bear.

Since 1950, there have been nine bear markets and 10 recessions in the U.S., and all but one have overlapped.

The chart below shows those recessions and bear markets, and you can see how closely they’re related.

So it makes sense to talk about recessions and bear markets together, because the one so often leads to the other.

That brings me to the venerated Economist magazine, which ran a compelling cover story last week saying the global economy is on the brink of recession.

But Oxford Club ETF Strategist Nicholas Vardy wrote yesterday that, despite a lot of similar fearmongering in the media, the current U.S. economic expansion is likely to continue.

In fact, Nick sees stories like the one in The Economist as a kind of counter-indicator. When he comes across a bunch of them, he figures it’s a good time to buy stocks.

Plus the magazine’s reasoning behind why the global economy is in for a reckoning was weak and unconvincing. “No expansion lasts forever” – that kind of thing. (I would like to point out that Australia’s economy has been expanding continuously for 27 years, and our friends Down Under posted another strong performance in the second quarter.)

The job of magazines like The Economist isn’t to predict recessions, of course. It’s to sell magazines. (I have to admit this one worked – I picked up this issue at the airport just because of the cover.)

What The Economist didn’t emphasize, but Chief Investment Strategist Alexander Green pointed out last week, is that it’s almost always an unexpected event – like the 9/11 terror attacks in 2001 – that throws stocks off their long-term trend.

Alex also wrote that timing the market – accurately predicting market tops and bottoms – doesn’t work. Those who claim to be able to do it are like fortune-tellers, with about the same amounts of accuracy and chicanery.

Here’s the bottom line from my two esteemed colleagues: Nobody really knows what will happen. While our economic fundamentals look very strong right now, it’s impossible to predict an event – like 9/11 or Saddam Hussein’s 1990 invasion of Kuwait – that could drag down the economy and the market.

How many economists, after all, foresaw the financial crisis of 2007 to 2008? Nobody at the Federal Reserve or the International Monetary Fund did. And unlike The Economist, their job most certainly is to predict the economy.

So you just don’t know.

And all you can do – other than ignore the prognosticators – is be prepared.

That’s why we at The Oxford Club counsel a properly diversified long-term portfolio. That doesn’t mean holding a bunch of different stocks. It means spreading your investments among different asset classes with different risk levels.

One of those asset classes, of course, is bonds. And while I don’t believe anyone can consistently predict markets, Bond Strategist Steve McDonald did predict the big market drop earlier this month. Steven and I discussed his big call last weekend.

Steve’s strategy of laddering bond maturities to capture higher yields while reducing risk is critical to diversification and portfolio safety for investors near retirement.

Good investing,

Matt