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Lessons From the Short Bear Market

The dog days bite.

John Rekenthaler, 08/28/2015

Socrates Says
Little did I realize when writing Lessons From the Long Bull Market, published only two weeks ago, that I would so quickly be composing its bookend. (Technically the U.S. is not [yet] in a bear market, which requires a 20% decline from peak value. But permit me the verbal symmetry.)

In my ignorance, I had plenty of company. Just as few foresaw the long bull market, few anticipated the recent downturn. Sure, there are people who have predicted 17 of the last three sell-offs, and who will claim to have called this one, too. Nope. Huddling in a tent for several years straight, then leaping up to exclaim "Aha!" when the thunder finally sounds, does not a rain doctor make.

Besides, the skeptics got the causes wrong. The stock market was supposed to tumble because of the Federal Reserve's loose policies (quantitative easing!), which would spark inflation and sink the dollar. But inflation has remained low, oil prices have plunged, and the dollar is strong. In addition, Treasuries have rallied, whereas per the bears' inflationary thesis they should have fallen. This downturn has not followed the bears' script.

In short, the shorts were caught short. As of course were the longs, as the inability to know the unknowable is an equal-opportunity affliction.

This collective fog makes post-crash interviews excruciatingly dull. Stay the course. Hold tight. Don't give in to your emotions. The bromides are mind-numbing. But they are correct, in that it is no easier to predict the market's recovery than it is its decline. This chart from FiveThirtyEight shows the results for a theoretical investor who moved to cash whenever stocks fell by at least 5%, then got back in once they recovered by at least 3%. Not pretty.

You know nothing. I know nothing. The person next to you knows nothing. From that realization leads the path to true (investment) wisdom.

The China Syndrome
China, too, is a bookend. When the revelry began in 2009, China was the toast. Now it istoast.

is vice president of research for Morningstar.

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