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What would happen in the next bearish market
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Loading...The last time the US stock market (S&P 500) registered a peak-to-trough decline of 20% was in October 2011. We had another bear market beneath the surface from 2014 through the mid-point of 2016, in which the median S&P 500 stock had lost 25% while small caps and international stocks fared much worse, but it didn't exactly ding the major averages quite badly enough to count as an "official" bear.
A lot has changed since the fall of 2011, both in terms of the drivers in the market as well as the attitudes of investors. Here's what may happens when the next bullish market comes down to a 20% decline.
Vanguard loses 10-15% of its AUM, an enormous outflow in a very compressed period of time as newly-minted passives realize that they're not quite cut out to be passive after all. The pain will prove too much for many recent indexing dilettantes who thought this was easy.
Reporters will be doing stories on the performance of the large robo-advisors and their "terrible" performance. Vanguard, Schwab, Betterment and Wealthfront will all be under the microscope.
Paul Singer and his fund Elliot Management, which just raised $5 billion in cash in 24 hours to take advantage of a coming major dislocation, will be on everyone's lips. They'll be the new hedge fund It Girl.
Buffett will once again look like a genius as he puts some of his $95 billion in cash to work.
Some lucky doom-saying charlatan who's been wrong about the market for 8 years will cherry-pick some of his crash comments and attempt to be the new guru of the moment. It won't work as well as last time though because these days we have social media – we have the receipts, player.
Many financial advisors, especially those who are mainly asset managers, will have trouble convincing clients to hang on to their portfolios. The mass disillusionment with risk assets will return faster than expected.
Gold will rise $200 or $300 an ounce, GLD inflows will explode. TLT will be the new momentum trade.
Trump will call for Janet Yellen's head on Twitter, accusing the Fed of hurting the markets to influence the 2018 midterms. She will announce plans to serve out the rest of her term (til January) and then resign, if this happens before then.
The yen will blow out to the upside vs the euro, wrecking stocks on both continents as contagion fears hit the headlines.
The long-short hedge fund crowd will get its "I told you so" moment, their investor letters will be dripping with schadenfreude for the indexing movement.
Ordinary investors who have not learned from history will be listening to all the worst advice, and making temporary drawdowns into permanent losses.
We will once again be told that buy and hold is dead. It will take the next 100% bull market from the future lows in order to resurrect the idea of indexing and passive investing. Lots of money will have been lost chasing holy grail strategies between the bottom and then.
Source: Bloomberg
Jr Trader Ivan Ivanov
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