When it comes to markets, many believe history rarely repeats itself, but it tends to rhyme. That is certainly the case with many bear markets. Although each bear is unique and distinct, they have common characteristics and patterns that appear repeatedly.
Analyzing the last two major bear markets can help an investor and trader better understand the dynamics and psyches of these markets.
Like a person grieving a loved one, bear-market psychology also follows a progression or a process in what psychologists define as the five stages of grief – denial, anger, bargaining, depression, and acceptance.
A selling climax or capitulation often signals the acceptance phase and the end of a bear market.
The bear market that started in November 2021 (i.e., Nasdaq and growth markets) and January 2022 (i.e., SPX, INDU, and listed markets) began as other classic bear markets.
Equities rallied to overbought or extreme overbought levels, trading far above their normal equilibrium levels.
Economic conditions worsen as rising inflation and fears of hawkish monetary policies trigger a recession.
Geopolitical tensions escalate as Russia invades Ukraine, sending food and energy prices skyrocketing and inflation soaring.
China's Covid-19 lockdowns also complicated the already troubled supply chain bottlenecks and fueled further inflationary pressures.
Fed and central bankers quickly implemented restrictive monetary policies, including rate hikes and quantitative tightening (balance sheet reduction) to contain rising inflation.
However, as central bankers tighten rates, the yield curve inverts, mortgage rates jump, and lending rates escalating, hurting the housing market and consumer spending.
Stock markets such as SPX, INDU, NYA, COMPQ, NDX, and other financial markets have entered bear market territories.
Bear markets tend to be gradual, often spending time in the denial and anger phase before gathering selling momentum soon after the bargaining phase.
Although sharp and sudden market declines are unusual in the early phases of a bear market, it has appeared in a few recent bears, including the October 1987 stock market crash and the 2020 Covid-19 Pandemic/recession.
Bear markets tend to fall to a price low just before the halfway mark of the total bear market cycle and then slow their descent soon afterward.
Bear markets can fall quickly toward equilibrium or fair value but can easily overshoot, depending on the severity of geopolitical and macroeconomic factors, investor psychology, and other conditions.
Rebounding from the low point of the bear market is a process and can be time-consuming, enduring for years and sometimes decades. However, there are outliers, including the sharp recoveries from the double-dip recession of 1982 and the 2020 Covid-19 Pandemic/recession.
It is difficult to determine how long the current bear market will sustain.
However, knowing the common characteristics, tendencies, and patterns of previous bear markets can be a start to assessing the current situation.
If the current bear decline follows the path of the Tech/Telecom Dot.com bear of 2000-2002 or the Global Financial Crisis/Great Recession of 2007-2009, the stock market and the economy will experience further volatility into the end of the year and 2023, and early-2024 under a worst-case scenario.
How low and for how long the bear market will depend heavily on when it can achieve the selling climax/market capitulation phase, coinciding with the acceptance stage.
If it resembles the previous bears, it can end next year or the following year. However, a Federal Reserve policy mistake that either prolongs inflation or leads to a deep recession can lead to a structural bear market and eight (8) to twenty (20) years of market turmoil.