From time to time, I like to ruminate on scenarios that would illustrate current trends and events relating to the stock market in an amusing light.
Below is a transcript of a hypothetical debate between investors with differing opinions about the stock market’s immediate future. The Bull represents someone who believes the market will go up, while a Bear represents someone who believes it will go down, with the Moderator serving as an impartial facilitator who kicks things off.
Scene opens with Moderator and Bull seated at a table on the debate stage.
Moderator: Bull, thank you for being here today. You weren’t easy to find – Bears seem to outnumber you 2-1 these days, although I should say Bear is nowhere to be seen at the moment.
Bull: I thrive when everyone is scared. All those bears sitting on their un-invested cash provide just the right amount of buying power I need to fuel my bull market.
Bear enters onto the debate stage and takes a seat at the table.
Moderator: Ah, there you are, Bear. I knew you’d show up eventually.
Bull: Good to see you, Bear. Are you all right? What’s with the bandage on your head? Maybe it was because the market was up 7% in Q4 2022 and 7% in Q1 2023.
Bear: I’m doing just fine, thanks. You, on the other hand, have one foot in the grave and another one on a banana peel right about now. Don’t try to spin things to make them sound better than they really are. You know full well prices are still down 13% from the high in early 2022.
Bull: What can I say? I’m obviously a little biased, but stocks stopped falling back in October. That’s a long time without a new low during a bear market. The daily price chart of the S&P shows higher highs and higher lows.
Bear: Your pride is largest just before the fall. The last high was in August 2022. You haven’t gone anywhere since then. And keep in mind I’m using the term “you” loosely here, since it’s really only Apple and Microsoft driving up the price of the market. The rest of the market is barely up this year.
Bull: That’s how markets work. That’s how they’ve always worked! The best get bigger until they aren’t the best anymore. I see it as a sign of security that so much is invested in those two successful companies. Would you rather more of the market be tied up in less successful companies?
Bear: Oh yeah, I seem to remember people thinking the exact same thing about the Nifty Fifty stocks back in the 1970s. Back then, there were stock market leaders thought to be invincible who not only fell in value, but fell in value more than the market. Since we’re going back in time here, can I interest you in a Polaroid camera?
Bull: Nah, the camera on my iPhone is way better. I’ll bet you had to go pretty far back in time to find that reference. What else ya got?
Bear: What about the effect of the Federal Reserve’s interest rate increases on the economy then?
Bull: Good point. Warren Buffett said it best when he said, “Far more money has been lost by investors in preparing for correction, or anticipating corrections, than has been lost in the corrections themselves.”
Bear: That sounds like a non-answer. Let me try for you – since 1980, every time the two-year rate has been above the 10-year rate, the economy has ended up sliding into a recession.
Bull: Anything can happen in the short-term, but this too shall pass. Just look at our scoreboard against one another. Historically speaking, I’ve won 85% of the time over five-year periods. Sure you win every once in a while, but the more time elapses, the better my winning odds become. Time is clearly on my side here.
Bear: What about the bank crisis? Remember 2008? That was one of my best years. Oh, those were the days.
Bull: 2008 nearly was a collapse of the financial system due to massive amounts of derivatives, but that’s not the case today. There may be other banks that go under, but the system will be just fine. The FDIC will see to it.
Bear: What about the debt ceiling crisis? Aren’t you worried the politicians will cause a market crash?
Bull: Although they could still cause some volatility in the market in the short-term, they will eventually come to an agreement. Any short-term weakness will be temporary.
Bear: What if China invades Taiwan?
Bull: I’ll admit that would not be good in the short-term. The thing is, there will always something to be concerned about if you look hard enough for it. Longer-term, things have a way of working out. For me, at least.
Moderator: Bull and Bear, thank you for being with us today.
Over the course of our conversation, I couldn’t help but notice how you focused on different time frames. Bears seem to be worried about the here and now, while Bulls are only concerned about the long-term. It’s entirely logical to be bearish in the short-term and bullish in the long-term.
Short-term market timing is very difficult, but it seems to be sound advice to protect some of your portfolio in the short-term if it allows you to stick to your long-term investment plan. This is better than being told to be dispassionate and unemotional in the face of turbulent trends, change nothing, and stick with your long-term investment plan no matter the pain it may cause you. We are all human and full of emotions. After experiencing short-term losses, those emotions can lead us to deviate from our long-term investment plan at exactly the wrong time. Avoiding extreme decisions, but allowing for short-term risk management while investing for the long-term, is a prudent approach to take.
Scene closes on the debate stage.