The Four Signs of a Pending Bear Market

Anthony Scaramucci and team have done a really nice job resurrecting the old Louis Rukeyser show, Wall Street Week. The guests have all been top notch. On a recent episode, legendary hedge fund manager Leon Cooperman shared some of his career background along with his thoughts about the markets:

In particular, I was interested in Cooperman’s take on the four reasons we typically see a bear market in stocks:

1. Stocks anticipate an on-coming recession
2. Euphoria and exuberance
3. An unpredictable geopolitical event
4. The Fed takes away the punch bowl by raising interest rates

Something I’ve heard over and over again lately is that stocks won’t have another bear market until we see a recession, which could be a few years away. It could be dangerous to completely rule out a bear market for this reason alone. As Jeremy Siegel showed in Stocks For the Long Run, since World War II, there have actually been five bear markets with losses in excess of 20% that have occurred outside of a recession. It’s possible we won’t see another bear market until the economy slows, but just because something is rare doesn’t mean you should automatically rule it out.

The other takeaway — and I’m stating the obvious here — predicting bear markets is hard. How many people or firms do you know that have a good track record of predicting the four signs that Cooperman looks for to know if there’s a bear market coming?

People have been predicting a double dip recession since about a month after the last one ended. Investor sentiment is becoming more and more difficult to grasp these days considering so much trading is done by computers and the bulk of the stock market is controlled by professional investors, not mom and pop anymore. Everyone thinks they know the current state of investor emotions, but it’s just so complicated to accurately gauge investor psychology. Even if you could predict geopolitical events ahead of time, no one can forecast how the markets will react to them. While the Fed will have to raise interest rates eventually, no one knows the path or timing of those moves. The end of quantitative easing was supposed to signal the start of market volatility. Instead the market has shrugged it off like nothing happened.

Every investor would love to be able to sidestep the next correction or bear market. We’re averse to losses so everyone becomes infatuated with predicting the next market downturn. Instead of constantly trying to guess which direction the next 10-20% move in the market will be, investors would be better served by accepting losses with equanimity and having a plan in place to deal with the inevitable drawdowns.

It’s a thought-provoking exercise to try to forecast the next catalyst that will move the market one way or another, but it’s not useful. No one can predict the when or the why with any consistency. No one has control over these four signals anyways, so most investors would be wise to let go of their dream of predicting when the next one will hit.

Check out the rest of the show’s episodes here:
Wall Street Week

Further Reading:
Delivering Alpha & Accepting Beta
How to Preserve Capital in a Bear Market

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What's been said:

Discussions found on the web
  1. Paul LaVanway commented on Jun 18

    I see you’ve been cited by Real Clear Markets. Two thumbs up Ben!

    • Ben commented on Jun 18

      Thanks. They do a great job curating the best stuff from the world of finance so happy to be included.

  2. Bob Carlson » The Four Precursors of a Bear Market commented on Jun 19

    […] manager, recently revealed what he considered the four warning signs of a bear market in stocks. This post lists them and makes comments. The bottom line is that it isn’t easy to see a bear market […]

  3. Scott Boone commented on Jun 19

    This is why using a dartboard as a predictive tool is so wonderful: the results are immediate and unambiguous, it provides a competitive element and the results are at least as good as the talking heads can produce, but at a much lower cost! With markets moving sideways, waiting for the Fed to move and/or for Greece to fish or cut bait, the number of opinions as to what people should do in preparation for the next big ______ (fill in the blank) seems to have skyrocketed. If your basic asset allocation is sound, this seems like a good time to turn off your news devices and pick up a good summer novel!

    • Ben commented on Jun 19

      Yup, the temptation continues to grow for people to do something, anything really, just because it feels comforting to make unecesssary changes. Patience is getting harder and harder to carry out.

  4. Steve commented on Jun 21

    I’m not so sure the Feds raising interest rates cause bear markets. There are many instances of rate raises and markets doing very well. The other three have some credence. But as you said it’s not easy to avoid downturns even knowing these things, so why try.