Unloved Bull Markets

Chapter 9Volatility Events

We have given the name volatility event to a certain situation in the stock market. Stock prices drop about 16% to 20% over about twelve weeks, then recover and resume the long-term upward path they were on before the volatility event. During the descent and especially at the bottom, there is a specific concern that is very well known by investors. In fact, they are focused on it. This is different than the beginning of a bear market when investors are usually baffled by the stock price declines because there is no obvious cause. Volatility events are triggered by news, whereas bear markets begin for no apparent reason. We believe volatility events are unpredictable. They have occurred in 1990, 1998, 2010, 2011, and 2018. Notice there were three of them during the post-2009 bull market. These are agonizing and painful for investors. Having three of them in one multiyear bull market sure contributed to the “unloved” nature. We suspect many investors sold during them and never returned.

Figure 9.1 shows the S&P 500 Index a few months before and a few years after the volatility event of 1990. When Iraq invaded Kuwait, it caught investors by surprise and sent the market into a twelve-week tailspin. There was a sharp decline, an almost equally fast recovery, and then a resumption of the long-term trend. The straight line emphasizes how the sharp drop was just an unpleasant interruption in the long-term trend. At the bottom of all volatility events, it ...