The Weekly: Bear markets and brains

Friday, Jun 17th 2022

Commentary

Welcome to The Weekly, where our team shares a few thoughts to take you into the weekend. The June 17th weekly is brought to you by Jared Schepis, one of our investment writers.

A Note on Bear Markets

The S&P 500 officially entered a bear market, dropping more than 20% from its most recent highs. While undoubtedly a milestone, it almost felt like a long time coming. The moment finally arrived on June 14th, when we officially dipped into bear market territory. Interestingly, despite the anticipation and concern surrounding a bear market, nothing fundamentally changed on June 14th. The last time I checked, gas costs $6 a gallon and my package still hasn’t arrived. 

So while yes, this is a historic and unsettling moment, we are comforted in the fact that we’ve seen this story before. To some extent, we know what to expect and have the tools to weather the winter. That’s not to say that this 20% drop from recent highs isn’t notable, but these moves would have happened with or without the label of “bear market.” In many ways, we believe that’s all that this is – a label, a diagnostic, a chance for the players in the financial sector to pinpoint and address a problem head-on. Think of it this way: because bears know that winter is coming, they can collect food, create shelter, and take whatever precautions they need to survive the cold. Now that it’s clear a financial winter is knocking on our doors, we can attempt to prepare for when spring arrives (because it will arrive), we might emerge from hibernation fat, happy, and ready for warmth.  

Here are a few facts you should know:

1/ There have been 26 bear markets (27 bull markets) since 1929, one every 3.6 years on average. 

2/ In a 50-year time horizon, you could expect to live through roughly 14 bear markets. Get a first aid kit!

3/ The average length of a bear market is 289 days, approximately 9 months. Only slightly longer than a bear’s average hibernation period! 

4/ Bear markets have only accounted for 20 years in the past 92 years of the stock market. Stocks rose 78% of the time (in years).

5/ While recessions and bear markets often go hand in hand, of the 26 bear markets, there have only been 15 recessions.

6/ In the past twenty years, 50% of the S&P 500's strongest days happened during a bear market. 

So no, the global financial system isn’t crumbling. We just believe it is the market’s way of blowing off steam. 

Some parting thoughts

When psychologists Daniel Kahneman and Amos Tversky coined Prospect Theory in 1979, snowboards had just been invented, Sony released the Walkman, the inflation rate was 13.3% and a 30-year fixed mortgage rate sat at 11.2%. It’s a vastly different world than it was in ‘79, but Kahneman and Tversky’s thesis holds just as true now as it did then.

In essence, the theory posits that investors value gains and losses differently, with losses carrying more psychological weight than gains. 

Consider the following scenario: 

Option A: 100% chance to win $45

Options B: 50% chance to win $100

Which would you choose?

Prospect theory expects the investor to choose the guaranteed option, choice 1, even though the expected utility of the seemingly riskier choice (option 2) is higher. Individuals are generally risk-averse, preferring an outcome with guaranteed returns regardless of the expected utility of the same choices. In other words, we like certainty over probable, and this irrationality drives our decision-making. 

Losses trigger a larger emotional response than equivalent gains. When applied to the markets it's no wonder that sell-offs trigger impulsive selling. People are programmed to avoid a loss at all costs, choosing riskier options in favor of a certain loss. We are quite literally programmed to sell.

Howard Marks, the founder of Oaktree Capital Management, wrote in his latest memo: 

“If the stock market was a machine, it might be reasonable to expect it to perform consistently over time. Instead, I think the substantial influence of psychology on investors’ decision-making largely explains the market’s gyrations.”

The presumption that rational decision-making drives the market, is fundamentally askew. We can’t expect the market to mirror rationality because the players themselves are unreasonable. 

If anything it's our irrationality, our impulses, and even our innate humanness that spurs the revolutions in the market. 

Or what we like to say: The stock market is the only store in the world where people don’t like the discounts.

We, at Titan, are human too. However, thinking in probabilities allows us to distill information more clearly in times of chaos.  For us, biases in the market are opportunities. And it is our acute acknowledgment of those predispositions that inform how we play the game.

In case you missed it

This week our team discussed the meltdown of crypto lender Celsius, and shared takeaways from the Fed's meeting on Wednesday.

  • The Titan Flash on the fall of crypto lender Celsius

  • The Titan Flash on the Fed’s drastic rate hike

Titan's in the media

  • Marketwatch interviewed Gritt Trakulhoon, our crypto analyst, for an article discussing why bitcoin and ether were down this week, suggesting that the majority of crypto’s crash “has to do with macro pressures.”

  • Gritt was also featured in “First Mover" CoinDesk’s flagship show that gives investors global market, business, and regulatory news stories impacting digital assets. (minute 37:00).

  • Gritt was mentioned in an Observer piece “The Worst Trading Days in the History of Cryptocurrency,” discussing the impact of bitcoin breaking its 8.5k-29.5k “floor” this week. 

Markets are closed on Monday in observance of Juneteenth, so we'll be back with Three Things on Tuesday. Have a great long weekend!

Titan Team

The above content and projections are the opinion of the authors. Any conclusions or takeaways are their own. This should not be considered as investment advice. Investing involves the risk of loss and returns are not guaranteed.

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