Dear Readers,
For those of you in the know, the term ‘bear market’ invokes a dreary image of falling stock prices, widespread pessimism, and unwarranted media punditry about the evils of the stock market and whatnot.
If you’re not familiar with what a bear market is, here’s a simple definition ‘A phase in the stock market that is characterised by a steep decline in the indices, usually by 20% or more’. A bear market is when things seem and companies are laying off people in droves.
Given the mysterious nature of the bourses, it is impossible to lay a bunch of axioms using which you can accurately identify and predict a bear market. However, there are some signs that have repeated themselves over the years, and it would do us well to learn about them. Here they are, in no particular order:
Unfettered Optimism:
The age-old human sentiment to ‘look forward to good things’ can often snowball into pathological optimism and cause investors, novices, and veterans alike, to place a heavy premium on market securities. This optimism is so overpowering and blinding that it can cause unexpected market surges and asset bubbles, the likes of which will eventually pop. Once the bubble bursts, it’s a downward trend till the market corrects.
Relentless optimism is a sign that ‘the party is coming to an end’, and cautious investors would either shuffle their portfolios to mitigate the coming losses or cash in on the frenzy to ride out the downturn.
Exorbitant borrowing costs
Everybody’s favorite enemy, normally the Central Banks of the respective countries generally intervenes in the midst of an overheating economy and slams the brakes by raising the interest rates. This raises the cost of capital, thereby making debt-fueled growth an expensive affair for companies that are looking to scale. Consequently, they go into cash preservation mode and end up halting investments, freezing hiring, and might even resort to layoffs in a bid to conserve cash.
cost of capital rises, it is inevitable that the market indices are going to act up by going down. Any impending announcements regarding hikes are normally an indicator of an incoming bear market.
Dampened Consumer Sentiments
However much our society likes to put the onus of wealth and growth on industrialists and leading businessmen, the fact of the matter is that the average persons (like me) makes the world go round. All businesses are ultimately linked to consumer spending (directly or indirectly) and if we as consumers believe that we’re in for a hard time, we will tighten our wallets.
This effectively reverses the flow of money away from businesses and into banks, thereby causing the market to depress, at least for the short term. As investors, it’s pertinent to watch out for signs of waning consumer confidence. If it persists for a prolonged period, chances are that we’re heading into a bear market.
Inflationary Pressures:
In a world that is as interconnected and fragile as ours is, the fabled ‘butterfly effect’ holds true more often than not. A war happening in one corner of the world could have a significant impact on the prices of commodities in another. The atrocities that are currently underway in Ukraine are a testament to how global geopolitical crises can amplify market trends, often for the worse.
Wars, pandemics, and other such historic events have had a demonstrated effect of igniting downward market spirals. As a savvy investor, it is your prerogative to catch on to trends like these and anticipate bear markets before the news is delivered to you in the form of decreased portfolio valuations.
And the Final Take way is
We hope that the above mentioned pointers have given you a rough idea of what to look for when attempting to figure out if you’re in a bear market or not. There are a lot of people out there who encourage you to time the lows and the highs of a bear market to make the most out of it. We believe this is a fool’s errand as the markets confound human understanding. It is best to cut your losses and play the game conservatively.
Remember, a bird in the hand is worth two in the bush.
