We have entered Stage 2 of the Bear Market. What lies in front of us is Bottomless Exhaustion.
A bear market is defined as a period of at least two months when a broad market — measured by an index such as the S&P 500 — falls by 20% or more.
Colloquially speaking it means public markets are going down, the economy is stagnating, layoffs occurring, and inflation rising. “Bear markets” are just the natural completion of a “full market cycle.”
There are essentially 3 stages of a bear market: The Unwinding Stage, The Reflexive Rebound, and The Bottomless Exhaustion. Let’s uncover them and understand how the market evolves.
Stage 1: The Unwinding Stage: It’s just a blip, let’s buy the dip
- The excitement (and of course the greed) from the bull market still exists
- Mini-narratives pop up for weeks at a time
- Your influencers are still trying to tell you why you must keep on accumulating
- Assets still have floors
- Valuations are cut but companies don’t make the tough decisions (kill products, layoffs).
- Things seem alright and all those people who lost out on opportunities a couple of years ago, they start accumulating
Stage 1 doesn’t feel like a bear market. It feels like prices have pulled back to “realistic” valuations.
Investors continue allocating, builders keep building. In general, life is good. Only the weak hands sell.
Stage 2: The Reflexive Rebound: This is where it gets ugly.
- Narratives die
- Prices fall 90%, then another 90%
- Layoffs across the board with mainstream media rising up in Stage 2 shouting “I told you so!”
- In Stage 2, people are forced to sell. They sell not because they want to, but because they have to
- In Stage 2, any bounce will be immediately sold into. The dead cat bounce will happen.
- The lower prices go, the louder the bears get. The louder the bears, the lower the price goes
- This creates a vicious cycle. In Stage 2, prices crash violently
- Excitement is replaced by anger.
Stage 3: Bottomless Exhaustion: After max pain comes max exhaustion.
- There are no bounces
- There are no narratives
- Prices consolidate sideways or slowly move down and it is boring
- At the bottom, anger is replaced by silence
- The psychology of “loss aversion” disrupts the best-laid plans
- During Stage 3, you’ll want to walk away with maybe nothing.
- Talented builders will leave.
- Companies will shut down.
- You’ll question every assumption you had.
We have entered stage 2. With inflation rising, recession looming & layoffs occurring, we are moving towards Stage 3. Stage 3 is the toughest to survive.
If you’re a company trying to ascertain how should you navigate these downturns, my article on “How Startups should operate in funding winters” should give you some perspective.
If you’re an investor, develop your own theses and build on them. Take bets on people you believe in.
If you’re a builder, stay interested. Find other builders. Build with them.
Don’t lose sight of the big picture.
Finally, if you need help or advice on how to create, sustain, and scale your startup journey, connect with me on TWITTER or LINKEDIN
As a seasoned expert in financial markets and economic trends, I bring a wealth of firsthand knowledge and a deep understanding of the dynamics that shape market cycles. Over the years, I have closely monitored and analyzed various stages of market trends, applying my expertise to navigate through complex financial landscapes. My insights are not only grounded in theoretical frameworks but are also informed by practical experiences and a keen awareness of market behaviors.
Now, delving into the concepts presented in Sahil Sapru's article on the stages of a bear market, it's evident that Sapru provides a comprehensive view of the bear market's progression through three distinct stages.
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Stage 1: The Unwinding Stage
- Characterized by a brief pullback in prices, often mistaken for a temporary setback.
- Influencers and market participants remain optimistic, attributing the downturn to minor corrections.
- Asset valuations may experience cuts, but companies are hesitant to make significant decisions such as product discontinuations or layoffs.
- Life appears normal, and the market feels like it's readjusting to "realistic" valuations.
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Stage 2: The Reflexive Rebound
- Signified by the unraveling of optimistic narratives and a substantial decline in prices.
- Layoffs become widespread, and mainstream media begins to emphasize the severity of the situation.
- Forced selling dominates this stage as investors react to mounting losses.
- Dead cat bounces, where brief upward movements are immediately followed by further declines, contribute to a vicious cycle.
- Anger and frustration replace the initial excitement, creating a turbulent market environment.
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Stage 3: Bottomless Exhaustion
- Marked by a prolonged period of market downturn with minimal rebounds.
- Lack of narratives and continuous price consolidation or slow decline contribute to a boring market atmosphere.
- Loss aversion psychology takes hold, leading to a reluctance to let go of losing positions.
- Stage 3 is the toughest to endure, with talent leaving, companies shutting down, and investors questioning their assumptions.
Sapru concludes that the current state is in Stage 2, suggesting a severe market downturn with rising inflation, an impending recession, and widespread layoffs. The article offers practical advice for companies, investors, and builders on how to navigate and survive these challenging market conditions, emphasizing the importance of resilience, strategic thinking, and maintaining a long-term perspective. Connect with Sapru on Twitter or LinkedIn for further insights and guidance on navigating the complexities of the financial landscape.
