Starting Small

Is there a bear market hiding somewhere?

Photo: Courney Celley/USFWS. Source: Flikr. Public Domain.

A bear market is a period of time where securities prices tend to fall. They can last from a few months to several decades. Some people think Japan’s stock market has been in an enduring bear market since 1989. Bear markets are marked by economic weakness and falling corporate profits. Often, they feed on themselves: falling markets lead to pessimism which leads to more declines which lead to more pessimism. They’re called “bear” markets because 17th century furriers might “sell the bearskin” before they had captured a bear. Later, the terms “bull” and “bear” were applied to buyers and sellers of stock in the South Sea Company during the South Sea Bubble of 1720.

Bull and bear markets don’t develop overnight. They have to be nurtured on investor sentiment. Sir John Templeton, one of the greatest investors of all time, famously noted that bull markets are born on pessimism, grow in skepticism, mature on optimism, and die on euphoria. The time of maximum optimism is the best time to sell, and the time of maximum pessimism is the best time to buy. Markets don’t do this because they’re perverse. They behave this way because market prices are driven by buyers and sellers, and the best time to buy is when there are lots of sellers and few buyers. Prices need to fall below their true economic value to entice buyers to come out of the woods.

Conversely, the best time to sell is when there are many buyers and few sellers. Prices need to rise far above their economic value to entice security holders to part with their shares, shares that represent ownership stakes in growing businesses, businesses that are universally admired and expected to be successful and dominant. That’s why investor sentiment is so often a contrary indicator: optimistic investors create high prices, high prices where the path of least resistance for prices is lower.

Source: Public Domain Pictures.

The irony of the market is that people are fearful when prices fall, when lower prices reduce their risk. People grow confident as prices rise, even if paying higher prices will result in lower returns down the road.

Bulls and bears are always lurking, waiting for extremes in sentiment to bring them out of hiding. It’s not the bear out there that’s dangerous. It’s the one that’s right between our ears.

Douglas R. Tengdin, CFA

Charter Trust Company

“The Best Trust Company in New England”

By |2019-10-02T07:37:56-05:00September 12th, 2019|Global Market Update|Comments Off on Starting Small

About the Author: