Is This Bear Market Different? | Podcast

Is This Bear Market Different?

November 2, 2022

Episode Description

FEATURING Dan Wiener and Jeff DeMaso

The past few months have been a wild ride—but is this bumpy trip through a bear market finally coming to an end? Chairman Dan Wiener and Interim CIO Jeff DeMaso are here to talk through recent developments, including:

  • Can value continue to outperform growth?
  • Has this bear market been as bad as feared?
  • How will the midterms impact stocks?

Sound, sensible investing advice often gets drowned out by the day-to-day headlines. Dan and Jeff cut through the clutter and discuss what recent moves really mean for your portfolio.

Episode Transcript

Dan Wiener:

Have we seen the bottom of the bear market? Is value going to continue to outperform growth? And what about the midterms? Listen in as I speak with Jeff DeMaso on another The Adviser You Can Talk To Podcast.

Hello, this is Dan Wiener and this is another The Adviser You Can Talk To Podcast. I’m here with Jeff DeMaso. He’s the interim chief investment officer at Adviser. And of course I’m our chairman and founder. And today we’re going to talk a little bit about the markets. And Jeff, nice day to talk about the markets after an incredible October, huh?

Jeff DeMaso:

It is. I mean, October’s coming off of a pretty incredible September as well, right? So September was down 9.3% in the S&P. It’s the third-worst September since 1957. And October bounced back big. As you said, it was a blowout month. It was the Dow’s 11th-best month since 1889. It’s pretty remarkable. And I think maybe that’s where we can jump off of. If we’d been talking a month ago, we would’ve said, “Hey, we’re clearly in a bear market.”

Dan Wiener:

Yep.

Jeff DeMaso:

And now I guess the question is are we still in a bear market? Are we not? How does what we’ve been through compare to history? Give us a little context here, Dan.

Dan Wiener:

Yeah. Well, I like to go to the charts sometimes and just look at how long bear markets have endured, how quickly they fall, those sort of things. And boy, when I chart the current bear market against some of the big ones that we’ve had over the last few decades, we’ve basically had three big bear markets over the last two decades. The bursting of the tech bubble in the aughts, the Great Financial Crisis, 2008, 2009, beginning in 2007, and then of course the very quick—but the clawing we took in the COVID bear. And the pattern remains the same. Some of these markets drop faster, some of them drop bigger. Right now, this is looking pretty average to me. I don’t know. What do you think?

Jeff DeMaso:

Yeah. I mean, I agree. If we put some numbers on it, the average bear markets since 1970 had a decline of about 37% and it’s taken 13 months for them to hit bottom. This one, and this is assuming that Oct. 12 was the low, and no guarantees on that at all, I’m not trying to make a forecast on it. But if that’s the case, then we’re talking about a decline of 25%, and it took about nine months to get there. So maybe a little bit below average in terms of magnitude and length, but in and around the averages, particularly given we’re not talking about a big data set here.

But for me, the really big point when it comes to bear markets is that they all end. Every bear market comes to an end and has been followed by bull markets and expansions. And if you look at those past end of the bear market and look out over the next one-, three- and five-year returns, you’re talking about some pretty attractive returns from those points. The five-year return on average from the end of a bear market is more than doubling your money, up around 120%. So again, point being bear markets end. They’re painful when you’re in them, but as long-term investors, you want to make sure you stay the course and hold on for those bull markets.

Dan Wiener:

The other thing that’s sort of characteristic at least of the last couple of big bear markets, and I’m going to take the COVID bear out because it happened so fast and it was over so quickly. But back in the aughts when the tech bubble burst—and in the current market when you could say to a certain extent the FANG bubble burst—the tech bubble burst, you saw this huge disparity in returns between what are typically called growth stocks and what are typically called value stocks. And the extreme between, you can look at it a lot of different ways, but let’s just look at 12-month returns. The extreme between the 12-month returns on tech stock, growth stocks, and the 12-month returns on value stocks—it was enormous back in the February time period in 2001, 2000. And then a year later it was extreme to the other end.

And the same thing seems to have happened here. We hit an extreme around the fall of 2020 and now we’ve hit another, I think, a fairly big extreme here during 2022. For small stocks, it really was earlier this year. For large stocks, the growth vs. value differential has really hit the extreme right about now. And boy, when these things bounce back, as you noted, it can be incredibly fast and incredibly strong. But these have both been in big outlier bear market extremes, running from growth to value. And we’ve seen that with the oils running hot now, and of course the big-cap growth stocks being taken out to the woodshed. How long does this last, do you think?

Jeff DeMaso:

I mean, the “How long does it last?” question I think is really impossible to answer. I guess what I would note on the growth vs. value, you talked about the tech bubble and a bit of a parallel to the experience we’re going through now with tech selling off and “value” stocks doing well. But in the global financial crisis, it was value stocks…the energies, the financial stocks, that did poorly. So I don’t think it’s enough to just simply say there’s a bear market coming, value’s going to outperform growth. Everyone’s a little bit different.

And frankly, I think the value vs. growth conversation can really distract investors from the practice of trying to be a good long-term investor. I mean, what is a value investor? What is a growth investor? All the managers I’ve spoken to, and I’ve talked to a lot of them, want to buy stocks today at one price and sell them in the future for a higher price, right? They want to buy it at a low value today, sell at a higher value tomorrow.

Dan Wiener:

Except back in the day when we used to talk to the people at Turner Investments, which doesn’t exist anymore because they were willing to pay a lot of money for stocks on the expectation they’d be able to sell them for even more money. And of course they blew up and they disappeared. But that’s history.

Jeff DeMaso:

Even then they expected stock prices to go up and that was kind of the game. But as you said, with these swings, it’s like certain types of stocks go in and out of favor. The market is driven by sentiment. Sometimes it’s like “Hey, tech is going to change the world and we all got to pile into tech.” And then other times it’s “Ah, no, it’s not changing the world. And energy’s where we got to be, oil’s where we got to be because there’s a war and supply chains are all screwed up.”

Dan Wiener:

I feel like it’s deja vu time around these oil stocks again, right? We’ve heard this before. I mean, it is really deja vu that the big oils are minting profits and they’re taking advantage of everyone. Boy, it wasn’t that way a couple of years ago.

Jeff DeMaso:

Well, this comes back to your question about how long does this go on, is that we know markets are cyclical and stocks come in and out of favor and trying to time those cycles are extremely difficult. Maybe, maybe someone can try and get the broad trends, but you are not going to get turning points for sure.

So I think the way to combat that is just to have balance in your portfolio. Have a diversified portfolio that gives you exposure to these different areas so you’re going to participate wherever the cycle takes us next.

Let’s maybe pivot it. We’re talking a bit about inflation here. And that October rally was interesting to me because coming into September everyone was worried about the Fed. And we’re recording on Tuesday morning, Nov. 1, and the Fed is kicking off their next meeting right now, where they seem likely to hike the fed funds rate. And we’re talking about transient inflation, pivot…

Dan Wiener:

Let’s pivot to politics. The midterms are coming. Typically the third year in a presidential cycle is supposed to be the best one. And if we get a divided Congress, that’s also supposed to be, in theory, good for stocks. Where do we go from here?

Jeff DeMaso:

This is a topic that we will come back to in more detail with our financial planning team because the elections and politics usually have more impact in terms of financial planning, taxes, estates and how we think about that. As you said, on the investment side, we try to keep politics out of our portfolios. I always feel like that there’s always half of our client base that has an opportunity to make a mistake by being upset about who is in the White House or who is in control of Congress, and avoiding being in the market. And then usually four years later, eight years later, the other half of our client base gets that same wonderful opportunity. That said, if we step back and just say, “Okay, what does the data tell us in looking at the market?” And as you said, that third year in the presidential cycle or third year of a presidential term tends to be pretty good.

And the data does back that up. We went and looked at how did the market do in the 12 months leading up to a midterm election. And on average, stocks gained about 4% in that 12-month period. But if you look at the 12 months following a midterm election, the market gained 16% on average. Now that’s not a ton of data points, that’s going back to the 1950s or so. So I wouldn’t recommend that anyone go all in and change their investment strategy just based on that data set—or based on politics either. I mean, the economy is a very, very complex machine. I mean, the cup of tea I have in front of me, the amount of effort and different pieces that went into getting that cup of tea to me are pretty mind blowing. And then…

Dan Wiener:

Wait a minute, are you reading the tea leaves, Jeff?

Jeff DeMaso:

I am.

Dan Wiener:

Is that what you’re telling me?

Jeff DeMaso:

They’re in the teabag, so I’m having difficulty seeing them right now. But what’d it take to get that teabag to you? It’s an insanely complex chain, and that’s just for a little bit of tea leaves. And then the stock market’s not the economy. And the political system influences those but is also a little bit outside. So trying to invest based off of one input, whether it’s a midterm election, the next Fed meeting, the next inflation report, I just think that’s a…you’re going to be chasing your tail and your portfolio is not going to be better off for it.

Dan Wiener:

So bottom line: Keep diversified, stick with your plan.

Jeff DeMaso:

These are timeless principles for a reason, Dan, and why we come back to them over and over again.

Dan Wiener:

We do come back to them. It’s real important.

Jeff DeMaso:

We think they’re important for clients to hear again, particularly in times like this where people are worried about the election, the Fed, the bear market, the war in Europe. There’s a lot of reasons to be worried right now and concerned, and consumer sentiment reflects that. Yes, again, bear markets happen and they’re painful and we feel that right alongside our clients, investing alongside them. But we also know that bear markets end, once again. They do end, and bull markets and expansions have outrun those bear markets in the long run.

Dan Wiener:

Right, and you know, you have to be an investor. You can’t be a trader. Traders get involved in a lot of portfolio activity, but it’s unclear that they make any money as a result. Meanwhile, we know that as an investor you will make money over time.

Jeff DeMaso:

Yeah, Fidelity did a study looking at the performance of accounts held at Fidelity and broke them into different groups based on how much they traded. And the best portfolios, the best-performing group of portfolios, were those that hadn’t been traded because the owner had passed away and there’d just been no activity. So yeah, some portfolio activity makes sense, particularly if it’s around rebalancing, managing taxes. There’s some nice upkeep that you can do to your portfolio. But generally speaking, an overactive trading, particularly if it’s not part of a disciplined strategy and process, tends to do more harm than good.

Dan Wiener:

And particularly if you’ve done the financial planning that we do at Adviser and you’ve gotten together with your team and you’ve said, “Here’s the allocation, here’s the distribution of assets we think is important.” This will get you to your objectives, to your goals down the road. You don’t want to be making trades that upset that well-crafted balance, primarily between stocks and bonds.

Jeff DeMaso:

Absolutely. And if you’re concerned, bring it back to your adviser and to your planner and run through the plan again and see if you’re still on track given where the market has moved. And you might be pleasantly surprised to see you are still on track. Cause a lot of plans take into account that bear markets happened. But if not, then at least you have the knowledge and opportunity to make shifts to try and improve the situation.

Dan Wiener:

All right, Jeff, thanks. Let’s leave it there. I want to thank everybody for listening to The Adviser You Can Talk To Podcast. If you enjoyed this conversation, please subscribe and review our show. You can check us out at adviserinvestments.com/podcasts. Your feedback is always welcome. If you have any questions or topics you’d like us to explore, please email us at info@adviserinvestments.com, and that’s adviser with an “e.”

Before closing, I’d like to thank Kailey Steele, Tim Veidenheimer and Ashlyn Melvin. They do all the hard work making this podcast possible. Jeff DeMaso and I just sit here and talk into the microphone. Thank you all for listening.

 

Podcast released on November 2, 2022. This podcast is for informational purposes only. It is not intended as financial, legal, tax or insurance advice even though these topics may be discussed. Past performance does not guarantee future results. All investments involve risk and can lose value. Always consult a financial, legal or tax professional before taking specific action. Information and events addressed in this podcast, as well as the job titles, job functions and employment of the podcast’s participants with respect to Adviser Investments, LLC may have changed since this podcast was released. For more information on each individual featured in this podcast, see the Our People section of our website.

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We know markets are cyclical. Stocks go in and out of favor, and trying to time those cycles is extremely difficult.


Jeff DeMaso, CFA

Interim Chief Investment Officer and Director of Research

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