Often times we hear debated the market’s ability to accurately reflect the health of the economy. Though a certain level of distortion exists throughout the market in terms of how well or how bad things are on Main Street, Wall Street does ultimately come to reality with the boots on the ground economy…even if it’s only a momentary reconciliation.
The purpose of a bear market is to bring the excesses that were borne in the bull market’s period back in line with reality. It’s sort of like fruit on a tree; at a certain point the level at which the fruit is ripe becomes ideal. That precise point is hard to know and the spectrum of ‘ripe’ may last quite a while. At a certain time the stage of being overripe arrives and shortly after rotten takes it place. The bear market has set in.
Bear markets are a natural and healthy process in our economic growth. They are not simply a trading phenomenon. Bear markets exist in the real economic world. If we look at the energy market and particularly oil, we see that high prices brought the development of new technology (fracking) into the market and an expansion of exploration and extraction. Greater supply was eventually created, which drove down prices to such an extent the glut in supply put a number of newly producing rigs out of production. A reconciliation with the new reality had to occur. That which was sweet in the oil industry became too sweet and bear market arrived.
As in everyday life, the party does not last forever. Heck, even the level of excitement at a party does not stay constant. Bear markets should not be feared, they should be understood.