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05/21/2008: "Bull, bear or something different? "

Investors who thought the credit crisis spelt a certain bear market must be wondering why the UK stock market is only 5% below its peak last year and 15% above the low reached at the time of the rescue of US broker-dealer Bear Stearns. Other major markets invite the same surprise. Apart from a reminder that market timing is far less obvious than private investors naively believe, what has occurred so far may be a specific warning that asset markets for many years may defy analysis, as the full significance of the debt problems is hard to take in and the profile and duration of the rehabilitation is poorly predictable. In this analysis, we should not take it for granted that the business cycle will describe a clear trend of either growth or decline; or that the equity and property markets will describe a clear bull or bear trend. After all, one of the lessons from Japan's lost decade is that the darkest hour was just before another false dawn.

This may make it a trader's market. It may also be a market for a systematic, agnostic long-term approach, adding to risky assets as prices fall and selling as prices rise, but always keeping the exposure consistent with the agreed tolerance of long-term real outcomes. Both have the virtue of a discipline and discipline may be the key to avoiding being whipsawed. Thinking about what whipsawing really means, remember that one symptom is that missing the best ten days in a period as long as 40 years would have cost you half the equity return premium over cash. Failed market timing really does hurt.