As a continuation of my previous article “Is The Bear Market Nearing Its End?”, let’s understand historical bear markets from multiple perspectives. 

Historical Precedents

In East 72’s latest quarterly letter, there is a table of past bear markets:

(Chart 1. Source: East72)

According to the chart above, a bear market can last as little as 23 days and as long as 637 days. On average, the bear market lasts for 285 days. 

While the stock market is heading towards its bottom, everyone wants to take advantage of this market opportunity.

There is one problem, though. On its way down, there could be multiple temporary increases in stock market prices commonly known as a bear market rally. 

This creates uncertainty for investors on when to buy more stocks. Investors do not want to be trapped in bear rallies by buying stocks only to see them falling even lower subsequently.

In the short term, it is natural to understand why investors want to make money in a short-term period of time. It validates their decisions. However, I would argue that if investors understand the fair value of their companies and are patient, they would still make money in the long term.

Let’s look at the two recent bear markets (the Dot Com bubble and the global financial crisis):

(Chart 2. Source: Coatue)

There were three bear rallies ranging from 48 days to 105 days. Investors who bought into these bear rallies lost money. 

(Chart 3. Source: Avondale Asset Management)

For the global financial crisis, the longest bear rally was 69 days. 

Where are we now?

(Chart 4. Source: CapitalIQ)

As of 23 July 2022, this rally has been ongoing for 36 days. 

There are both strong and weak arguments about whether we’ve reached the bottom, or if this is just another bear rally. I’ll leave it to the experts.

By historical standards, it’s still very early. Remember, the longest bear rally during the Dot Com bubble and global financial crisis were 105 and 69 days respectively.

This is why I believe the next 30 days are crucial as listed companies are reporting their quarter 2 results. Earnings of Apple, Amazon, Meta Platforms and Tesla will influence the movements of S&P 500 as they have huge weightage.

(Chart 5. Source: Slickcharts)

Do I Wait For S&P 500 to Bottom?

This depends on whether you are investing in the index or individual stocks.

If it’s the index, then you may want to wait a bit longer as past precedents showed bear rallies could be longer than 36 days. 

If you’re investing in stocks, consider this: some investors may think that if S&P 500 has not reached its bottom, it is dangerous to buy any stocks right now. After all, stocks are affected by sentiments. It’s a popular fallacy. 

While sentiments do play a part, stocks can move independently of indices like S&P 500 or Dow Jones Industrial. Behind every stock is a business. Each business has its own growth trajectory and valuations. 

This is why in chart 4, you see companies like Sea, Crowdstrike, Palantir and Celsius Holdings reached their respective bottoms earlier than S&P 500.  

The clearest example is Celsius Holdings. 

(Chart 6. Source: Google Finance)

Celsius Holdings reached its bottom on 27 January 2022 and it started to rally. This could be caused by strong first quarter results where Celsius grew its revenue by 167%. For S&P 500, the forecast for 2022 is roughly a 7-12% revenue growth. From a past 6 months performance basis, Celsius is up 70% while S&P 500 is down 10%. 

Companies like Crowdstrike and International Money Express also defied S&P 500 and started their own price movements.

Unless you’re investing in the S&P 500 index, I found close to little value in timing your purchase using the index. 

Let’s go back to the fundamentals.

If some of my companies are able to cope well with inflation and continue to report good results, I will go ahead and start scooping up some shares already. After all, we need bad sentiments in the stock market to get good prices for our companies. 

The best competitive advantage for me during a bear market is behavioural. 

Either way, we must understand that the long-term returns of any investment are heavily dependent on the earnings growth of a company. Not in timing the market. 

I hope this is convincing for all of you as I do not want all of you to miss out on opportunities in the stock market just because you’re eyeing the S&P 500 index. 

Summary

1. Based on historical precedents, more time is needed to tell whether we have reached the market bottom.
2. Stocks can move independently of indices like S&P 500 or Dow Jones Industrial. 
3. Behind every stock is a business. Each business has its own growth trajectory and valuations. 
4. Remember your identity as an investor, not a market timer. Create your watch list of companies, and perform your valuations. As long as they are performing well and their share prices are attractive, consider accumulating some shares. 

With the S&P 500 potentially dropping lower, it may be scary for investors to enter the stock market right now. While it is near impossible to buy stocks at the absolute bottom, the good news is that even if your timing is not perfect, you can still emerge wealthier from this market crash compared to doing nothing at all.

The important thing is to invest in the right companies – there are some that are more resilient than others. If you’re interested to know which companies are worth investing in, I’ll be holding a LIMITED-TIME foundation class to share how you can identify the right stocks that may be starting to rebound from the bottom! Click here to register now.