I have no idea of when this bear market will end. I have no crystal ball. But I was not remembering what has to happen for it to officially end. The purpose of this post is to describe that event.
We can only have a bull market or a bear market. There is nothing in between. The S&P 500 – the index that tracks the market value of the top 500 stocks – became a bear market because the index dropped 20% below its previous peak. The S&P 500 index closed at 4,796.56 on January 3. It closed this past Monday at 3,749.63. That’s more than a 20% decline.
The S&P 500 will become a bull market when it closes on a day when it has increased 20% above its previous low point.
== We won’t be whole ==
That will mean we will be in a bull market before we get back to the peak on January 3. I think you remember the math: it takes a greater percentage increase to gain back the percentage decline. If you had a $100 and it declined by 20% or $20 to $80, you need a 25% increase to grow by $20 to get back to $100. The steeper the percentage decline, the greater the percentage increase you need to get back whole.
If the decline from the peak was 20% to be then be an official bear market and then immediately improved 20% to then be an official bull market, you’d still be 4% below the peak.
And we know that the decline as of yesterday is greater, so a 20% increase from that point leaves you 8% below the peak.
== Thinking real ==
The usual math ignores inflation. We nest eggers always try to think real. We track our portfolio value and return rates by eliminating the distortion of inflation. We’ve had almost 5% inflation since December, so we’ve really had nearly -27% real decline in the S&P 500 portion of our stock portfolio as of yesterday. Ouch. It’s a big lift to get back.
It may take more time to reach the low point. It will take time to see a nominal 20% increase from that low to then be a bull market. Each month inflation will nibble at the the spending power of our portfolio. We’ll really have a greater distance – more time – to go truly reach a bull market and to truly get back to the January 3 level.
== I ignore the Jan 3 peak ==
Our brains always focus about the change from the peak, but January 3 is not the peak that concerns me. I’m concerned about 12-month real returns and real portfolio value on November 30, the date I use to see if our Safe Spending Amount (SSA; see Chapter 2, Nest Egg Care) will only adjust for inflation or if it will increase in real terms. My peak is 3% below the January 3 peak. I don’t have to come back quite as far, but it is still a distance. It looks now as if I won’t calculate to a real increase in our Safe Spending Amount for 2023, but that’s Okay. Patti and I are more than fine with what we pay ourselves now.
Conclusion. We entered a bear market this week. The market is 20% below a prior peak on January 3 this year. We can only be in a bear market or a bull market. We get back to a bull market when the market closes at 20% above its prior low point. Even if the market turns on a dime now, a 20% increase and the declaration of a bull market doesn’t get us back to the prior peak. The math tells us we need a greater percentage increase to gain back the decline.
The descriptors of bear and bull markets ignore inflation. Month by month inflation is nibbling away at our portfolio value. The portion of our portfolio represented by the S&P 500 really declined by 20% before this past Monday. When they announce we’re back to a bull market, it won’t really be a 20% increase from the prior low.