The term 'bear market' will invariably send some shivers up the spines of many an ASX investor. Although there will be many Warren Buffett disciples out there that will tell you buying when there is blood on the streets is the quickest way to share market riches, the reality is that most investors like to see their shares go up in value and not down. But a bear market means a falling market. It is technically defined as a market that has retreated by more than 20% from its most recent high.
Now, the S&P/ASX 200 Index (ASX: XJO) is not in bear market territory yet. Yes, the past few weeks have been nasty. But since topping out at 7,632.8 points last August, the ASX 200 has fallen only 6.4% away from that high on today's pricing. Even when the ASX 200 hit the '6000s' earlier this month, we only got to falls of around 9%.
That stands in stark contrast to the US markets right now. Last Friday saw the flagship S&P 500 Index (INDEXSP: .INX) enter bear market territory for the first time since the COVID crash of 2020. Although the US markets saw a late uptick on Friday night (our time), it wasn't enough to prevent the S&P 500 from recording a 20% drop from its most recent peak during the trading session. The US's tech-heavy NASDAQ-100 (INDEXNASDAQ: NDX) has already entered bear market territory recently.
So is a grizzly bear market coming for ASX shares? Or is this just a cub for Aussies?
Is an ASX bear market coming?
Well, according to an article in The Age yesterday, it could, unfortunately, be the former. Financial writer Matthew Lynn describes the possibility of an ASX bear market as looking "inevitable". Here's how he described the situation as he sees it:
Why? Because bear markets triggered by recessions are always the worst, and we are now heading for a deep downturn; because valuations were already crazily over-stretched at the peak; and because policymakers are completely out of ammunition to counter the sell-off in equities. Then, add it all up and the market rout could well turn into one of the worst in post-war history…
It might not necessarily match 1973 with its 48 per cent fall. But neither does it look like a mild correction before equities start to march higher again. There is still a lot of pain ahead – and this bear market will be a big one.
Well, not exactly a rosy outlook for ASX shares there, to be sure. Yes, there is always the possibility of a bear market and a protracted period of sub-optimal returns from shares. But that's just a normal and accepted part of investing. History shows us that ASX bear markets are a regular occurrence. But it also shows us that markets have never before failed to reach and exceed previous highs.
