You Know It When You See It

As Justice Potter Stuart said about pornography, you know it when you see it. The press won’t call it a bear market until it meets the official definition: a decline of 20% from the high. The current S&P 500 loss is 18%. But if it looks like a bear market and quacks like one too, it probably is. This is one by any definition. Consider the following peak-to-trough losses:

Nasdaq -30%

Bitcoin

BTC
-56%

Cryptocurrency Luna

LUNA
-100%

Long-Term Treasury Bonds -20%

Ark Innovation ETF -71%

Ironically, by the time a bear market is named, it’s usually closer to the end than the beginning. People tend to bail on asset classes at this point. This creates the final leg downward called capitulation. Trying to time the bottom is impossible, but the worst thing to do now would be to sell high quality stocks and bonds.

On the other hand, as I wrote in December, assets that can’t be valued like cryptocurrency, should never have been owned in the first place. Some of them will come back but most of them will disappear like the misnamed Luna “Stablecoin.” Just as during the dotcom bust there were hundreds of Pets.com (that sold for a sock puppet and a song) for every Amazon

AMZN
, there will be many ghosts of past companies that litter the ticker for months to come. Eventually, they get delisted and people move on. The difference with quality (as opposed to growth) is it tends to stick around. There’s never any guarantee that even a blue chip company will still be here in a decade’s time, but it’s always a better bet than a faddish meme stock or the latest NFT.

Use the current bear market to pick up beaten down quality securities on the cheap. Should they decline further, history is still on your side buying at this level. Unusually so, this is a bear bond market in tandem with a bear stock market. But even after Treasury bonds suffered 8% losses in 1994, they rallied 23% the year after (the inflation expectations at the time turned out to be overdone and bond prices had already priced in tremendous pain).

So you know it when you see it. It’s a bear market, no matter what the media calls it. That should be a reason to still sell the wrong things but buy the right ones.