‘V’ or ‘W’ Doesn’t Matter Considering 2022

Is the pain over? As March sunsets, stocks have pared most of 2022’s early plunge. Are we on the right side of the “V” shaped recovery that usually follows corrections? Or is it a breather before a “W” bottom spirals downward again before any real later year rebound? Alas, no one can really know. That is among the more maddening aspects of corrections. Anyone claiming to pinpoint stocks’ sharp gyrations is a charlatan or fool. But I do know keeping cool in corrections renders big rewards before too long.

In January, I told you 2022’s midyear combination of US political gridlock and fading global fears spelled a great year for world stocks—but with a rocky, grinding first half to endure. No, I didn’t foresee global stocks’ near-immediate drop or Putin’s horrid invasion. Pinpointing any pullback’s start or end is a fool’s errand. Gut-churning short-term gyrations like this are the price investors routinely pay for stocks’ high long-term returns. Volatility and stocks go hand-in-hand. Embrace it. Don’t try timing it. You can’t control it—only how you react.

Early Year Tumult Isn’t the Biggest Danger

None of the past two months’ news—Putin’s tragic, foolish Ukrainian war, big headline inflation numbers, China’s COVID surge—has changed my belief stocks’ early year struggles are a bull-market correction, not a newborn bear market. As I told you in late February, bear markets typically start gradually, quietly, with stocks slowly sliding down a slope of hope—a false sense of security that sucks more people in—including the legendary last “greater fools.” Only exceptionally rarely can real bear markets begin with a steep plunge. They legendarily “start with a whimper, not with a bang”—no early warning bell. Unlike bear markets, corrections—fast swoons of -10% to -20% off a global peak—stem from any or no reasons. They come and go pretty swiftly, with most attributing the drop to one or several big, widely publicized super scary stories that are awkward to impossible to disprove. Today’s widely watched fears—the Ukraine war, oil, inflation, rate hikes and political wackiness—fit the profile perfectly.

Corrections’ biggest danger isn’t the market drop itself. Far worse is enduring the slide … only to throw in the towel and sell before the rebound. Bounces off the bottom are fast and furious, often like the last few weeks, whipsawing those seeking to sidestep full-fledged bear markets that never materialize. “W” shaped bottoms make selling even more tempting—the second trough often feels far worse than the first, dashing the prior rally’s hopes. Resistance is vital.

Big Fear, Bigger Bounces

Defining and dating bull market corrections’ beginnings and ends—especially in the pre-war period—is as much art as science. Everyone has a favored methodology. But by my count, since good data start in 1925, we get one about every two years. The median decline? -13.8% over a 2.1 month span, not including dividends. But the rebounds come roughly as fast—the median recovery took just 2.8 months.

Crucially, correction bounces rarely stop there. As scare stories prove false, stocks keep soaring past prior highs. Again since 1925, the median S&P 500 gain six months post correction low was 23%! A year after the low? 30%. Two years? 44.0%!

This isn’t ancient history, either. There have been 10 S&P 500 corrections in the last 25 years. The associated scare stories ranged from the Asian financial crisis and Russia’s 1998 default to the second Iraq War and Europe’s sovereign debt crisis. The median decline was -14.4% lasting 2.6 months. Recovery took a median 3.6 months, with stocks rocketing 29.3% in the 12 months off the low—24 months later they were up 48.9%.

But what about Russia? Europe’s energy crunch? Inflation? Rate hikes? Remember: Corrections always bring scary “this time is different”—first and worst—narratives. They grow exponentially more frightening when war is included—further to why it’s crucial to stay cool.

Stocks Don’t Do ‘Good’ or ‘Bad’

Remember: Stocks don’t weigh news in an absolute sense. They compare future reality to prior expectations. Markets pre-price events based on fears, opinions and forecasts. So ask yourself: Even if today’s worries have significant economic impact, are they unknown to markets—hence not yet factored in to prices? Doubtful—these fears have headlined for many weeks, some for months. Bank of America’s March survey shows global fund managers as dour on equities as any time since March 2020, with inflation and geopolitics their big concerns. Polls from German investor confidence to US consumer sentiment absolutely tanked after Putin invaded.

Historically, instead of a “V” shaped bottom, about a third of corrections feature a “W” double- bottom. So maybe 2022’s correction ended with mid-March’s big bounce. Or maybe it was a head-fake. For portfolio decisions, that means zilch. While short-term wobbles may or may not persist, acting on them is folly. If you miss the first, usually strong, burst off the low, you miss critical important gains that compound as stocks churn higher. In my 50th year managing money professionally, I have never seen anyone who could pinpoint such volatility. Who can time pure sentiment swings? Feelings are fully fickle.

You won’t get equity-like returns with less than equity-like volatility. So embrace gyrations. Stay cool. With stocks and steep plunges, patience rewards in time, always.