Rick Rule is famously known for stating that the author of a bull market is a bear market and the author of a bear market is a bull market. What is really happening that causes a bull market to happen and then a bear market to show its face?
This is a very relevant issue because stocks have been in a bull market for six years and it might very well be time for the long-awaited correction everyone is anticipating. Already, real estate prices are starting to waver in different parts of the country, and we aren’t seeing the rapid price appreciation everyone was getting addicted to over the last six years, either.
The Bull Market
So here is how a bull market starts and ends. Usually, there is almost no one that participates at the start because everyone was scared off from the correction/crash that preceded it. So the bottom is usually never clear because most people are still wondering if everything has stabilized or is now going to go higher. As prices start to rise, money starts to tentatively enter again from the sidelines and asset prices rise slowly. After prices have steadily gone up for a period of time, the larger amounts of money start to come in with more confidence and prices start to rally with some momentum. This is when we see hedge funds and institutional money really start to enter a market, which get prices really fired up. This all has to do with investor sentiment and the psychology of the market. So after the big money enters, everyone and their mothers really start to jump on board, regardless of affordability and reason, just for the sheer fact that if they don’t want to miss out on any more future profits.
The Bear Market
And here is where we go into a bear market… Just like the bottom isn’t clear, neither is the top, and it is very common for investors to sell prematurely only to see prices continue to rise, losing out on more gains. Inevitably, there comes a point where a large enough amount of sellers hit the bid and prices start to retreat. Many times, this is coupled with the fact that buyers are at their max in terms of what they are willing to pay for an investment. If the market has gone high enough up and for a long enough period of time without a major correction, investors will want to cash in. The problem here is that when a large amount of inventory/securities start hitting the market at once, prices fall. When prices fall, buyers get hesitant, and the only way for the sellers to sell is to drop their prices. There are times when this can be dramatic, i.e. 2008.
The problem with investor sentiment is that fear is more of a driver than hope or gain for people. So the fear of losing money is on both the buyer and seller side of the equation, and when this sort of attitude gets brought into a market, sellers panic, buyers freeze, and the result of this gets exaggerated downwards, creating devastation for those who bought high and lent to those who could not afford. For others, great opportunities are created.
We are approaching a time where stocks have been rising for six years, along with real estate. With oil at and below $50, home prices beyond affordability, and stocks near all-time highs, there are very real concerns that asset prices across the board are going to tumble. And when they do, many things will come as a result, including higher unemployment, lower consumer spending, and a halt in the overall economy moving forward.
This is good news for those who are anticipating this and are prepared with cash on the sidelines to enter these markets.
This is not an informal suggestion to go out and sell your stocks and homes and wait for a correction, but it is an alert that you should be saving your money for a time where assets correct and you will be able to act. Accumulating at discounted prices will maximize your returns and will be a habit you will thoroughly be satisfied with over the course of your lifetime.