Charts of the Month - September '23
The Big 7 vs. The Old Guard, The U.S. Consumer - Not Dead Yet, and The Dirtiest Cities in the World
We highlight a framework that helps us get a sense of what round of the current bear market we are in.
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No Fed, US Mid-terms, or FTX/SBF talk today - we promise.
Instead, we wanted to highlight a framework to help us get a sense of what round of the current bear market we are in.
First things first, let’s resurface Bobby Vedral’s framework for the current bear market (first published here):
“That we are in a bear market is obvious. The question is what kind. In my view there are three types: technical sell-offs (like 1987), systemic-crisis (like 2008) and healthy asset-deflations (like 2001-02). I think we are in the latter, which is only natural after 40 years of bond-bull-market and a decade of free-money. The problem with Asset-Deflation Bear Markets (ADBM) is that they are long.
Now, if we are in an ADBM, then there are three stages: first, wild up-and-down swings – to get investors tired. Then, consistent down-markets, to get investors to capitulate. Finally, a whipsaw, to discourage even the last optimist … before markets find a bottom and recover.
I think we are in Phase 1, which means I expect vicious short-squeezes while the overall trend is lower.”
Goldman Sachs has instead put forward the idea that this is a Cyclical bear market (“typically triggered by rising interest rates, impending recessions and falls in profits”, and is a “function of the economic cycle”) rather than a Structural one (“triggered by structural imbalances and financial bubbles”, where “very often there is a ‘price’ shock such as deflation and a banking crisis that follows”), which is what Bobby has been arguing in favour of.
This distinction matters quite a bit as Structural bear markets have almost 2x the downside of Cyclical ones and last for significantly longer.
Goldman does not believe this is a Structural bear market because:
Whilst Goldman’s view implies that, ultimately, there’s less downside to asset prices vs Bobby’s view, they both agree to the fact that it’s still too early to call the bottom.
To Bobby’s credit, the analogy with the asset deflation witnessed in 2001-02 has been looking pretty accurate so far.
In fact, S&P 500 performance in 2022 implies that we’re still in Phase 1 (“wild up-and-down swings – to get investors tired”), with October witnessing (for the fifth time) a sharp bear market rally. This is one of the main traits of this market – a continued downward trend repeatedly interrupted by painful bear market rallies.