3 Things: Bear Markets, 401k Crisis, Revisions

Do You Need A Recession For A Bear Market

It has often been quoted in the media and by mainstream analysts that economic recessions are the root cause of “bear markets” in stocks. However, is that really true?

George Soros once discussed the idea of “reflexivity” suggesting that:

Reflexivity sets up a feedback loop between market valuations and the so-called fundamentals which are being valued. The feedback can be either positive or negative. Negative feedback brings market prices and the underlying reality closer together. In other words, negative feedback is self-correcting. It can go on forever, and if the underlying reality remains unchanged, it may eventually lead to an equilibrium in which market prices accurately reflect the fundamentals.

By contrast, a positive feedback is self-reinforcing. It cannot go on forever because eventually, market prices would become so far removed from reality that market participants would have to recognize them as unrealistic. When that tipping point is reached, the process becomes self-reinforcing in the opposite direction. That is how financial markets produce boom-bust phenomena or bubbles. Bubbles are not the only manifestations of reflexivity, but they are the most spectacular.”

This idea of reflexivity is important in understanding the relationship between market psychology and the ultimate outcome of the markets themselves. While the vast majority of the media and analysts continue to assert the markets are fine because there is currently “no signs of recession,” it ignores the impact of the psychology of the participants.

Eric Parnell recently noted the same stating:

The basic assertion is the following: the U.S. economy is not showing signs of entering into recession, thus stocks are not at risk of falling into a sustained bear market.Unfortunately, this conclusion is not necessarily true. For history has shown on numerous occasions that you do not need to have an economic recession looming on the horizon to see U.S. stocks fall into a bear market.”

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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