It’s Okay to Double Dip

Story Highlights:

• Bad news is still abundant and will remain so, and the market declines over the last several days show investors are still jittery. Markets might even retest November 2008 lows.
• We can't say if the market's bottomed, but we know markets typically recover in a mostly "V" shape usually composed of several jagged pullback movements.
• Following bear markets, one sector underperforming doesn't undermine the overall market's recovery—think of tech stocks after 2002 or oil after the early 1980s.

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It seems each day adds new voices to the chorus of bad news. On Wednesday, Financials firms Citigroup, Deutsche Bank, and HSBC added to global markets' drop as they . Their refrain sounded ominously familiar—could this signal another round of the Financials troubles we saw last fall?

It's clear Financials' weakness remains. Economic uncertainties tied to still-indeterminate promises of monetary and fiscal stimulus still matter. The broad market sell-off over the last several days shows investors are still jittery. The market may even retest November lows.

From November 20th through 2008 year-end, the MSCI World rallied 19.5%. We can't say if November 20th marked the bear market's bottom, but we do know markets typically. But it's never a perfect V. Think Plato. There are hypothetical "forms" and then there's the way those forms appear in reality. The "V" bull market recovery is a clean and abstract way of thinking about the market recovery, but the reality will be much messier. "V" shapes are evident when looking at market returns over its long history—however, zoomed-in views of each "V" reveals not one sharp turning point, but several jags similar to a stalagmite-crowded cave floor (which Plato was fond of using in his famous ).

The new bull market will not march fixedly upwards. Maybe double-dipping's a social violation when it comes to chips and carrot sticks, but markets know no such etiquette. New bull market pullbacks are common occurrences. Sometimes the pullbacks' magnitudes are quite steep—leading many to declare the initial rally merely a bear market bounce. But short-term dips are okay for long-term investors—always have been, and today is no different.

Market-timing these pullbacks is near impossible and likely damaging for long-term investors. Double dips, including the subsequent upturns, often occur in just a matter of months. The 1962 bear market saw the S&P 500 rise +14.3% from the bottom, fall -10.5%, before rising +40.2%. Following the 1974 bear market bottom, the S&P 500 rose +20.8%, fell -12.8%, then rose another +45.7%. More recently, in the 2002 bear market, the S&P 500 rose +20.7%, fell -19.3%, before rising again.**

Such negative moves are there to continue terrifying investors out of the market. economic news will continue to be dour for a long time but markets are likely to climb in the face of it. Discipline and patience must continue to prevail for now, though double-dipping will likely always remain unpleasant for most.

Sources:
* Thomson Datastream
* All bear market pullback data: Global Financial Data