Catalysts That Have Ended Bear Markets

We know what typically causes a bear market. An inverted yield curve and
an 80% rise in oil prices in a 12-month period have preceded almost every
market decline of 20% or more. This is why this was the title of my November
4, 2021 Investment Update.

While we know what causes bear markets, we don’t know exactly when they
will happen. Usually they occur within 18 months or so of an inverted yield curve
and/or a major spike in oil prices. So, the bad news is that a bear market occurred
now instead of in fall, when serious market declines usually happen. The good
news is that the “curse” of higher oil prices has been removed as the S&P 500 has
now dipped just a hair over 20% from the high earlier this year. The negative
impact has now been factored into current stock prices. Now the conditions have
likely been met for a new uptrend to begin at anytime.

Bear markets in the previous growth cycle from 1982 to 2000 were limited to
20% except for the 1987 Crash, when the S&P 500 fell 34%. Corrections since the
Financial Crisis in 2009 have been limited to 20% except for the Covid selloff in
2020, when the S&P 500 fell 34%. Can you see the similarity there? Isn’t that
amazing! So far, the magnitude of declines in this growth cycle seems to
mirroring what happened from 1982 to 2000. If history repeats, hopefully any
future declines in this growth cycle, including this one, will also be limited to
20%, since we have already had a more serious decline in the earlier stages of this
cycle.

There were only 3 declines greater than 12% during the previous growth cycle
from 1982-2000. The Crash of 1987 was 34%; there was a 20% decline after the
US Commercial Loan Crisis and the invasion of Kuwait by Iraq in 1990. There
was a 19% correction in 1998 when Russia defaulted on its debt and a major
investment fund, Long-Term Capital Management, collapsed. (This fund was
managed by two Nobel Prize winning economists, showing that basic principles
of investing and risk management still apply to everyone!) We have already had
three declines of 19% or more in this cycle. (Late 2018, Spring 2020 and early
2022.) While it may seem as though stocks are very volatile with three bear
markets in just over four years, this may be setting the stage for a long period with
only minor declines, as was the case in the 1990’s. The illustration from FactSet
below shows the intra-year declines from 1980 to 2012. As the illustration states,
“Despite average intra-year drops of 14.7%, annual returns were positive in 25 of
33 years,” or 76% of the time.

Due to what has happened in the past, previous Updates this spring have stated
that the amount of time the S&P 500 will actually spend down 20% or more will
likely be measured in hours, not days or weeks. So far, that has been the case. The
S&P 500 had to fall to 3855 to be down 20% from the January 2022 high. The
S&P 500 fell to 3857 a week ago and then fell to 3822 earlier this week but closed
both days much higher than the lows. The lowest close has been 3,901 on May
20th which was down 19%. Please see a YTD chart below showing the closing value of
the S&P 500 from WSJ.

Is this bear market over now? It is helpful to see how previous bear markets
have ended in order to answer that question. When U.S. stock market averages fall
by 20%, it really attracts the attention of U.S. government leaders and the Federal
Reserve. Therefore, in many cases, a decline of this magnitude has been the
trigger for the Fed to lower interest rates.

For example, when interest rates skyrocketed in 1981, the Fed started lowering
rates in early 1982. Since the recession was so severe, it took a number of 0.50%
interest rate cuts until stock prices finally turned up on a dime on August 13,
1982.

When stock prices fell 20% in one day on October 19, 1987 (the Crash), the
Fed lowered interest rates by 1% the following day. Although markets
experienced a double bottom in early December 1987, the low point for that bear
market occurred on October 20, 1987, the day rates were lowered by 1%.

Stock prices fell 20% in 1990 as oil prices soared to record highs when Iraq
invaded Kuwait in the summer of 1990. Investors were anxious after that since
they could sense that the US was going to react with military force. U.S. stock
prices rebounded instantly when the Iraqi military crumbled right after operation
Desert Storm began on January 17, 1991. The Long-Term Capital Management
bear market in 1998 ended when the Fed intervened by lowering interest rates and
making promises to maintain market liquidity in August 1998.

After a long bear market from 2000 to late 2002, the U.S. was preparing to
invade Iraq to remove “weapons of mass destruction” that, it turns out, never
really existed. Stock prices remained in a funk until the U.S. invaded Iraq. U.S.
forces invaded Iraq and took control very quickly. The result was that the 2003 to
2007 bull market began within a day of that invasion in March 2003.

When the Financial Crisis occurred in 2008, all sorts of actions were taken by
the U.S. government and the Fed to try to restore stability to the financial system.
However, nothing seemed able to remove the cloud of despair and anxiety over
investors, business owners and the public. Then, in the early hours of trading on
March 10, 2009, the large U.S. bank, Citigroup, announced that it was going to
post a profit for that quarter. Citigroup had suffered great losses during the crisis
so this was a positive surprise for everyone. It showed that the response to the
crisis was finally having a positive affect. This one announcement flicked a switch
changing the view of the glass being half empty to being half full. Confidence
started to return on that day and we have never looked back. The recession
eventually ended and a whole new long-term bull market started on that day.

The 19.9% decline in December 2018 ended when the Fed announced that they
would not be raising rates as much as planned in early January 2019. The Covid-
19 selloff in March 2020 ended when the Fed lowered rates and took other
historic measures to buy bonds and make sure there was enough cash in the
financial system to avoid a recession or depression when the global economy was
shut down.

Now, in 2022, there is not much the Fed can do to lower interest rates because
inflation is so high. It is very unlikely that NATO or the U.S. will act directly to
push Russia out of the Ukraine to end this military conflict. Consequently, at this
point in time, it may be up to news from a U.S. company or a group of U.S.
companies to restore confidence to end this bear market.

That is exactly what seems to be happening this week. We have all heard how
rising inflation, rising interest rates and supply chain issues are causing problems
in the economy. However, are rising interest rates really negative? They may be
for borrowers, but it is positive for savers and lenders. Rising interest rates are
positive for banks since higher rates create more of a spread between shorter-term
and longer-term rates. A larger spread means banks can earn more profit by
lending money. There has been so much pessimism that many investors may have
forgotten about this. This is why the shares of JP Morgan rose 6.2% on Monday,
after the bank said it was going to meet key return targets sooner than expected
thanks to rising rates giving it’s lending business a boost. Citigroup shares also
rose 6% while Wells Fargo shares jumped 5%. Shares in the U.S. Banking Index
ETF (BKX) rose from the recent low of $103.82 on May 12th to close at $115.13
today. That is a gain of 11% from the low. (Keep in mind that BKX was down as
much as 30% from the high on January 13th.) This is a huge improvement in the
outlook and the value of this most significant sector of the stock market.

Shares of Target and Walmart fell when they announced poorer results from
their stores. This led investors to think that the entire retail sector was suffering
because consumers are struggling. Those who have lower incomes tend to shop at
Target and Walmart and that segment of the population can suffer the most when
the price of fuel, food and goods rise as they have. However, retailers like Macys
and Nordstrom and GAP reported much better than expected corporate results.
This shows that other consumers are still eager to shop and buy new clothes as
they are able to take part in more activities as Covid restrictions ease. The positive
quarterly reports for U.S. banks and some U.S retailers showed that investors had
become too pessimistic about the economy and the prospect for corporate profits.

The pop in the value of financial stocks, some retail stocks and high tech
stocks this week has renewed investor confidence as U.S. market averages are
poised to end a 7 week closing streak today. At the time of writing, the S&P 500
is trading at 4,130, which is down 14% from the all-time high. This means that
stocks have already recovered almost one-third of their total losses in this week
alone.

As I have said before, bear market bottoms are violent affairs. The final part of
the decline and the initial recovery happen very quickly. This is what makes it so
difficult to sell and buy back at lower prices. In the past, bear markets have often
ended when there has been some sort of catalyst. Usually, the catalyst has been an
announcement by the Fed lowering interest rates. Successful invasions were the
catalysts that ended bear markets in 1991 and 2003. During the Financial Crisis,
the catalyst was the one announcement from Citigroup that marked the end of the
bear market and the beginning of the end of the recession. As I have stated many
times, the financial sector is a very significant sector for the markets, since banks
indirectly provide the “fuel” for consumers and business owners. In 2022, I think
we will look back and see that the announcement from financial giant JP Morgan
was the catalyst that restored the confidence of investors. This announcement
changed the perception of investors to viewing the glass as half full instead of half
empty. This helped to restore confidence.

It is important to remember how important confidence is. Confidence is the
most powerful and influential emotion that drives our economies and markets. A
catalyst that restores confidence has ended bear markets and recessions. Time will
confirm if the announcements this week were indeed the catalysts that ended the
Russian Invasion/High Inflation bear market of 2022.

The long-term oscillator for BKX has turned up decisively from the lowest
level since the 2008 Financial Crisis this week, providing convincing evidence
that a new uptrend may have started.

The oscillators for the other major U.S. market averages are just starting to turn
up now, so they could provide more confirmation if there is more follow through
next week. Please see the oscillator for the S&P 500 on the next page. (Supplied
by Refinitiv) Thank you for your trust and confidence as we navigate uncharted
waters!

 

SAR Update

 

I cannot provide details but I don’t think the public has any idea about how
many calls the RCMP attend that involve someone wanting to commit suicide or
an attempted suicide. Sometimes our team is called to assist if this might be
happening in the hinterland. I take my hat off to these dedicated caring men and
women who deal with these distressing and heartbreaking situations day in and
day out. They are absolutely amazing!

Talking about navigating uncharted waters, at 10 pm on Sunday night our team
was called to find and rescue some men who were stranded on their boat stuck on
a sand bar in the Harrison River area. The area of the river just upstream from the
Harrison Mills bridge is called Chehalis, which means “stuck in the sand.” It is a
most appropriate name and we have had to rescue many people there. We took
two of our special SAR Seadoos which have jet drives instead of propellers so
that we can go in shallow waters and not damage the watercraft if we hit a gravel
bar, which we did several times.

I was driving one of the Seadoos with a new team member sitting behind me
who was just finishing his 5 month training period. Searching in these shallow
waters with gravel bars and grass meadows is like searching in the everglades of
Florida. While we have powerful lights on the Seadoo, searching in the dark and
watching the depth of the water at night was extremely challenging. We did see
several sturgeon in the very shallow water ranging from 4 feet to 8 feet in length
so that was amazing! After searching for almost an hour at a very slow speed, I
managed to spot a light in the distance. I tried to make my way to the light and
then I saw a fire. I yelled out to see if they needed help and they said yes. That is
when I knew we had found them. My colleague got off the Seadoo and walked in
the water to find a path through the narrow channel that was deep enough for the
Seadoo to drive through. I got off and pushed the Seadoo over some very shallow
sections and then drove the rest of the way to their location. I left my colleague
there while I and the other Seadoo team took the men back to where our command
center was stationed in Harrison Mills. When I returned to pick up my colleague,
it took me three tries to find the right channel to go into. Being left in the middle
of nowhere in the middle of the night in a place that was challenging to find must
not have been very comfortable for him but he handled it well. It was very
satisfying to have been able to find the men and bring them back to safety at night
in an area which is very difficult to navigate at the best of times.

We returned to the base at 1:30 am and got a screwdriver to clean out the rocks
that were stuck in the intake grate so that the Seadoos could function they way
they should in case we got another soon after. I finally got into bed at 2:30 am,
looking forward to a good rest!

However, my colleague was so excited that he got to participate in his first
rescue that he was at the SAR base later in the morning refuelling the Seadoos and
washing the trucks! It was great to hear that. It is interesting how different things
turn people’s cranks. It was another very gratifying experience for me too.

One thing I will stress to you, your loved ones and your friends is this.
Whenever you go out on a longer trip make sure you and everyone with you has
their cell phone with them AND THAT THEY ARE FULLY CHARGED. Have a
phone charger in your vehicle, boat, ATV etc. Carry an extra battery pack that can
charge your cell phone if the battery gets drained if you are not in a vehicle. I
heard of a young woman who died in the mountains very close to Vancouver
because she was lost and her cell phone battery died. We have been on many
rescues where the people that needed help either did not bring their phone with
them or they ran out of battery power. An external battery pack makes a very
useful inexpensive gift. Everyone should have at least one battery pack and a
charging cord when heading off the beaten track. Be safe out there and have a
great weekend my friend!