Bipolar disorder is a mental disorder that causes unusual shifts in mood, energy, and activity levels. These moods range from periods of extremely “up,” elated, irritable, or energized behavior (known as manic episodes) to very “down,” sad, indifferent, or hopelessness during the depression phase. – National Institute of Mental Health (NIH). I’m not a mental health expert (my wife is), but doesn’t bipolar disorder sound eerily like what the stock market suffers from? The stock market goes through wild swings of optimism and then can quickly shift to periods of severe depression, then back to optimism, with this cycle continually repeating. Want just a few examples?
Going back a bit further we can see similar patterns throughout the stock markets history. If we deem that the stock market suffers from bipolar disorder. What can we do about it?
Maybe we can learn from what the National Institute of Mental Health recommends for treating bipolar disorder in individuals. First, we need to understand it's a lifelong illness and usually requires lifelong treatment. However, the NIH says following a prescribed treatment plan can help people manage their symptoms and improve their quality of life. Their (abbreviated) treatment plan includes a combination of:
Let's use the NIH as a template for our suffering stock market and related investors. First, we need to understand that the stock market suffers from this condition and it's lifelong.
As investors, we will be dealing with the stock market and its bipolar disorder for the foreseeable future. Since we as individuals can’t “fix” the disorder the stock market suffers from, we need to decide how we are going to interact with the market when it’s going through its various periods of hopelessness and manias. -Paul R. Rossi, CFA
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Why are so many of the same companies mentioned in the news day in and day out? The Scatterplot below might help explain why: The chart shows all 500 companies of the S&P 500 represented by light purple circles. In contrast, some of the largest companies are displayed in other colors. These highlighted companies each earned (Net Income) $20+ Billion dollars over the last 12-months and several are worth over a Trillion dollars.
And now you know why these companies are so prominently featured in the news. They are behemoths in every sense of the meaning. When they hire or fire, enter new markets, create new products, build new buildings, they have a deep and wide impact within their respective industry. -Paul R. Rossi, CFA Above is a chart of the U.S. GDP (Gross Domestic Product from 1947 - 2022). Since the end of World War II, the U.S. economy has grown tremendously. GDP is now a staggering 10 times larger than it was back in 1947. Oh, and by way, this includes enduring 12 recessions (grey lines) along the way. Above is a price chart of the Dow Jones Industrial Average going back to 1930. It includes some major world events, The Great Depression, several wars, and 15 recessions. If I was a betting man (and I am), I wouldn't bet against the United States continuing to grow and do well over time. The key part of this phrase being, "well over time." We are going to experience some tough times both now, and in the future...this unfortunately is unavoidable. Plan accordingly. Tough times don't last, but tough people (and investors) do. -Paul R. Rossi, CFA
Many times opportunity comes wrapped inside a scary situation, dealing with hardship, or simply accepting change. But nearly every time it ends up requiring a person to step outside themselves and take the proverbial leap of faith. What’s a Bear Market? It’s an opportunity… and it’s scary, it's a hardship, and it requires taking a leap of faith. What is the conventional definition of a Bear Market? The Securities and Exchange Commission (SEC) defines a Bear Market as a period of at least two months when a broad market falls by 20% or more. The Standard & Poor’s 500 index, which includes virtually all of the largest and most well-known U.S. companies is in an “official” bear market (if you didn’t know this already), since its peak on Jan. 3, 2022. Since 1928 there have been 26 Bear Markets with an average length of 289 days. No doubt about it, psychologically a Bear Market can be challenging. The impact can be particularly hard for investors who do not have a well-designed plan as they see their retirement accounts and investment portfolios shrink. And this can create a self-fulfilling cycle, as investors perceive an impending bear market tend to prompt investors to sell even more, thus pushing prices down further and prolonging the pain. What psychologists call a “Negative Loop Cycle.” What's the good news and what opportunity might a Bear Market provide? For those investors who have psychology and time on their side, a Bear Market can offer:
So during a Bear Market, there are quite a few things an investor might do, and probably the most important idea you might consider changing is the nomenclature from Bear Market to “Opportunity Market.” -Paul R. Rossi, CFA |