Avoiding a bear market is all very well, but risks may still be elevated. Is more market bleeding likely, or is it possible that stocks have already bottomed?
History suggests further pain lies ahead. Corrections are much briefer affairs than bear markets, but they tend to last for months (the average correction has lasted around five months), not weeks. Similarly, Bespoke Investment data suggests brutal months for the Nasdaq – the tech-heavy index fell 9. 5 per cent in January – tend to be an indicator of further volatility
However, corrections are usually good buying opportunities, even if you don’t catch the bottom. Buying the S&P 500 after it fell 10 per cent would have been followed by median gains of 15 per cent over the following year, notes Goldman Sachs.
This trend has been especially strong in recent decades. Since 1980, says LPL Research's Ryan Detrick, stocks have suffered 10-15 per cent declines on 13 occasions. Stocks have been higher a year later on all but one occasion, averaging gains of 22 per cent.
Washed-out retail investor sentiment is also encouraging. Bears outnumbered bulls by 30 per cent in a recent American Association of Individual Investors (AAII) poll. That's a more fearful reading than 98 per cent of past polls, notes Compound Capital Advisors' Charlie Bilello. Such bearish extremes are associated with above-average returns over the following three-, six- and 12-month periods.
Overall, LPL Research is bullish, saying stocks are “in the process of forming a meaningful bottom”, but cautioning that 2022 is “going to be much more volatile than last year”.
