The bare truth about the bear market

It is now official. The US stock market is a bear market, defined as down 20% or more from its peak.

Why bear?

An ancient proverb warns that it is unwise to sell the bear’s skin before one has caught the bear. By the 18th century, the term bearskin was being used in the phrase “to sell (or buy) the bearskin.”

Bearskin was quickly shortened to bear, meaning stock sold by a speculator. “Bear market” evolved to one where speculators dumped their holdings of stocks, driving down their price.

The opposite of bear market – “bull market,” with strongly rising share prices – has murky origins. Nobody seems to know for sure where the term bull market came from.

How bad has the bear market been so far?

The widely used US stock price index, S&P 500, plunged to 677 in March 2009, in the wake of the 2008 global financial crash. Despite corona, it rose to an all-time high of 4,797 in January. That is a 600% rise. If you invested in 2009, your stocks grew in value seven times.

By June 20, the S&P had fallen to 3,670, a drop of 23.9%. Technically, a bear market, but still five times higher than the 2009 low! It all depends on your perspective.

Israeli stocks have fared somewhat better lately. The TASE 125 more than doubled since its July 2, 2012, low, peaking at 2,146 on January 12. By June 13, it had fallen to 1,799, a drop of 16.2% – technically, not quite a bear market.

Why have Israeli stocks done a bit better in recent weeks than those in the US?

Two reasons. First, Israeli start-up exits brought a flood of dollars into Israel, filling the government’s tax coffers and propping up stocks.

Second, Israel’s economy has done better during the pandemic than that of the US. During the past two years, only twice in eight quarters has GDP failed to grow, with slight declines in the second quarter of 2021 and 2022. In contrast, the US economy saw a massive contraction in the second quarter of 2020, when the pandemic worsened.

Why have central banks’ interest rate hikes upset the markets so much?

The best way to understand this is through the analogy of addiction.

Central banks slashed interest rates after the 2008 crisis and global GDP growth slowed, averaging only 3% during 2010-2020. Interest rates were close to zero for years, and after adjustment for inflation, became negative. Banks paid you to borrow. My bank offered me, incessantly, cheap loans, and I am just a pensioner.

Like addicts, businesses and consumers grew reliant on cheap credit all over the world. The US Federal Reserve, under its Chair Jerome Powell, pooh-poohed burgeoning inflation until, belatedly, interest rates rose by 0.75% in one fell swoop on June 14, the largest hike in 28 years. Investors took this very hard.

Businesses, investors and consumers are now forced to go “cold turkey” – wean themselves from cheap credit almost overnight – after a decade of near-zero interest. This is proving very tough for all.

Why do many of us long for Stan Fischer, Bank of Israel Governor for two terms?

Fischer served for years as the International Monetary Fund “fireman,” prescribing stiff economic medicine for countries that overspent, over-borrowed and got into hot water. After this tough baptism of fire, he became Bank of Israel Governor in January 2005, and navigated Israel through the 2008 global crisis. He slashed Israel’s interest rates in the wake of the crisis, then became the first Central Bank to begin to raise them, in September 2009. Unlike Powell, Fischer did not miss the boat.

He stepped down as governor on June 30, 2013. Global Finance magazine gave Fischer and the Bank of Israel “A” grades for four straight years. I wrote about “Stan, Our Go-To Man” in The Jerusalem Report on April 26, 2010.

The current Bank of Israel Governor, Prof. Amir Yaron, spent his entire career in the Ivory Tower. He has been largely invisible in recent years. As an Ivory Tower pensioner myself, I recognize the huge gap in macroeconomics between theory and reality.

We need a “fireman” to manage our shekel, not an egghead. As Israel heads again toward a national election for the fifth time since April 2019, a sure steady experienced hand at the helm of the Bank of Israel is vital, in the face of political instability.

Why has it proved so hard to put a lid on inflation? For instance, gasoline now costs over eight shekels a liter in Israel, a record high.

Here is my analysis. Inflation is driven, mainly, either by demand-pull (lots of money chasing fewer goods), or by cost-push (supply chain problems, low productivity, wage hikes). Ever since Keynes’ 1936 book, The General Theory of Employment, Interest, and Money, we have tackled inflation by slashing demand, or, during depression, by boosting demand.

But the current global wave of inflation is largely cost-push – supply side. And economists and hence policymakers have very few tools to spur supply. They are like carpenters who see every problem as a nail – smash it down, even if it is really a pane of glass.

Inflation? Slash demand, hike interest rates – even though that brings recession and cuts demand. Many expect a global recession in the wake of soaring interest rates and resulting stagflation (inflation plus stagnation), as in the stagflations of 1973 and 1979.

What should ordinary investors do about the fall in stock prices?

The standard advice is, don’t try to “time the market.” It is not a good time to sell your shares. Or your bonds, for that matter – bond prices too have dived lately, as interest rates and yields rose. Best to take a long view.

Writing in the business daily The Marker, Michal Palti notes that many tech stocks have risen phenomenally over the past 20 years. Nvidia rose 330%, Enlight 393%, AMD 490%. Investors who practice buy-and-hold have done very well over the past 20 years. Amateurs who dump stocks after brief downturns lose money to insiders, who buy up bargains.

Take, for instance, the US Dow-Jones 30 Stock Index. On February 1, 2000, at the turn of the millennium, it stood at 10,155. Its new peak came in January, at 37,000, nearly four times higher! To date its decline has been 16.3%, not quite a bear market and similar to the TASE 125 decline. For most stock investors, their portfolio has gained nicely, despite recent declines.

What should we ordinary folk do about the looming global recession?

It is always a good idea to set aside a small nest egg, whenever possible. With heavy fog surrounding the Israeli and global economies, it is always reassuring to have a cushion of some sort.  ■

The writer heads the Zvi Griliches Research Data Center at S. Neaman Institute, Technion, and blogs at www.timnovate.wordpress.com