Liam Dann: Why the Bear market is the real deal this time

Bear market: Trader Peter Tuchman works on the floor of the New York Stock Exchange, Monday, June 13, 2022. AP Photo.

OPINION:

The post-pandemic bear market has arrived - finally and with a degree of inevitability.

Markets all over the world this week slumped below the key threshold (a 20 per cent fall) required to earn the grizzly moniker.

Technically it's the second time they've hit that threshold since Covid hit.

Markets crashed in to bear territory in March 2020. But that slump was so short-lived it failed to dent the bullish investor culture that had grown up on years of unrelenting growth.

This one is the real deal.

In March 2020 trillions of dollars of central bank and government stimulus kept recession at bay during the uncertain early days of the pandemic.

It also artificially re-inflated markets for everything from houses to cryptocurrencies - and of course shares.

Now we're facing the real cost.

This is a proper bear market of the variety we haven't seen since the dark days of the global financial crisis in 2008.

Does the label matter?

Logically, whether the major markets are off 19 per cent or 21 per cent shouldn't mean much to long-term investors.

But in times like this sentiment trumps logic. That's what the bear brings.

It drives sentiment that reverberates well beyond the daily market ups and downs.

That sentiment is fear.

The terms "bear" and the "bull" markets are quirks of 19th (or perhaps even 18th) century trading terminology. The exact origins are lost to history.

It's assumed that they reflect the styles in which the animals attack - bulls thrusting upwards and bears swiping down.

Bear attack: The origins of the term bear market are lost to history but likely reflect the downward swipe of the paws. File Photo.

Others suggest it refers to bearish habits like hibernation reflecting investor retreat and exit from the market.

Of course when markets retreat it's seldom at the gentle loping pace of a bear.

They usually involve a panicked stampede.

A skittish antelope or gazelle might be more appropriate as a metaphor.

Ultimately the bear and the bull are proxies for the fear and greed which take hold when investors move as a herd.

Right now there is fear about inflation, fear about the rise of interest rates and fear that these things will bring recession.

The market has been bear-ish all year as investors braced for these things.

But there was hope that the process might still be controlled and orderly - that the central banks might engineer a soft economic landing.

Friday's worse than expected US inflation number (8.6 per cent) up-ended that.

It induced an all too predictable panic on Wall Street.

A near-term peak for inflation no longer seems certain, which means we can no longer assume that the end point for interest rates is fully priced in.

Confidence has been rattled.

Now all eyes are on the US Federal Reserve which meets this week and will offer a fresh take on the US economic outlook (Thursday morning NZT).

Then what?

Well, buckle up and hold tight - especially if you're a long-term investor.

This sell-off likely has some way to go yet.

Only when investors see evidence that inflation has peaked and can forecast a more certain end-point for interest rates will things stabilise.

Even then there may be a sting in the tail as the higher rates take their recessionary toll on the economy and corporates reassess their earnings outlooks.

It will take some time for the cycle to turn.

History suggests that real bear markets linger for a year - sometimes two.

They can see major indexes fall from peak by 30 per cent or more.

But history also tells us that the bull market always returns and that it rewards those who hold their nerve.