Is this a bear market? (EP.255)

Episode Summary

Executive Summary: The episode frames the market selloff as a normal bear market within a broader re-pricing driven by inflation, rising rates, and fading Fed support. Michael and Ben argue that while pain is real, the S&P 500’s drawdown is historically typical, stocks and bonds are both re-rating, and cash timing is dangerous. They also examine wreckage in ARK, fintech, and high-multiple tech, while noting strong fundamentals at Apple, Amazon, Google, and Chipotle.

Main Topics: Is this a bear market or a normal correction? (Priority: 5/5): The hosts debate whether the selloff qualifies as a bear market and stress that a double-digit drawdown is historically common. They argue that despite widespread fear, the current decline is not unusual in magnitude yet and could still end with positive annual returns. Inflation, rates, and the end of the Fed put (Priority: 5/5): A central thesis is that inflation and rising rates have changed market behavior. The Fed is no longer immediately bailing out equities, which they believe has reduced the likelihood of V-shaped recoveries and increased the chance of a lower-return environment. 60/40 diversification under pressure (Priority: 4/5): The episode addresses concern that stocks and bonds are both down, unsettling investors who relied on the traditional balanced portfolio. The hosts argue that higher bond yields and a possible inflation peak improve the forward-looking case for the 60/40 mix. Tech and growth stocks are being re-rated (Priority: 5/5): They discuss massive declines in FANG/Mag 7-type leaders, ARK-related names, and money-losing growth businesses. Their view is that low rates and easy liquidity supported extreme valuations, and the market is now demanding profitability and real cash flow. Company-specific earnings show a split market (Priority: 4/5): The hosts contrast beaten-down stocks with fundamentally strong companies like Apple, Amazon, Google, and Chipotle, which continue to grow revenue and buy back stock. The message is that strong businesses may remain attractive even after major declines. Fintech, Robinhood, and crypto enthusiasm unwind (Priority: 4/5): Robinhood, Coinbase, and related fintech names are used as examples of valuation compression and fading retail speculation. They criticize weak monetization, falling active users, and the gap between private-market hype and public-market reality. Media, habits, and off-topic lifestyle/recommendation banter (Priority: 2/5): The back half includes lighter discussion of TV and movies, including Ozark, Tokyo Vice, Better Call Saul, Suicide Kings, and the Bogle Effect, reflecting the show’s usual mix of markets and culture.

Key Arguments: A 13% S&P 500 decline is historically ordinary; the average intra-year peak-to-trough drawdown is roughly 13%, and double-digit drawdowns happen in about two-thirds of years. Despite widespread bearishness, market history suggests many years with deep drawdowns still finish positive, so the base case is not necessarily a catastrophic full-year loss. Stocks and bonds are down because inflation and rate normalization changed the regime; the old zero-rate, Fed-backed environment that enabled quick rebounds is gone, at least temporarily. A recession may already be priced into the market; if a recession is avoided or inflation falls quickly, stocks could stabilize or recover. The 60/40 portfolio may have better forward returns now because bond yields are materially higher than they were nine months ago. Selling to cash is dangerous because re-entry timing is nearly impossible once investors get comfortable sitting out. The worst speculative excesses—SPACs, IPOs, ARK, crypto, altcoins—have already been hit hard, which may be evidence that a lot of the froth has been washed out. Strong large-cap companies are still growing fast enough that valuation compression, rather than collapsing business models, explains much of the stock-price pain. Companies like Amazon, Apple, and Google may become more attractive simply because their businesses are still expanding while shares are much cheaper than recent highs. Robinhood and similar fintech names are examples of the market no longer subsidizing unprofitable growth; cost of capital now matters. Homeowners have gained substantial tappable equity, which cushions balance sheets even as first-time buyers face an ugly affordability environment.

Data Points: S&P 500 drawdown: 13% - Referenced as the current peak-to-trough decline and compared to historical averages. Average intra-year S&P 500 drawdown since 1950: ~13% - Used to argue that the current selloff is not historically extreme. Years with double-digit drawdown: 59 of 94 years (~63%) - Based on data back to 1928 showing how often the market falls at least 10% during a year. Years finishing up after double-digit drawdown: 58% of the time - Shows many years recover from a sizable intra-year decline. Years finishing up double digits after a double-digit drawdown: 40% of the time - Supports the argument that big midyear drops do not preclude strong annual gains. 60/40 portfolio return: 11.3% annualized from 2009 to 2021 - Used to remind listeners that recent history for balanced portfolios was exceptionally strong. AGG yield to maturity: 3.4% - Cited as evidence that bonds now offer better prospective returns than during the low-rate era. Personal savings rate peak: 30% - Pandemic-era spike cited as a contributor to inflation pressure. Personal savings rate current level: 6.6% - Back near pre-pandemic levels, suggesting less excess cash to sustain demand. Average homeowner tappable equity gain: $67,000 - Black Knight estimate of equity growth available to mortgage holders over two years. Total U.S. housing wealth gain: $6 trillion+ - Shows homeowners have benefited materially from the housing boom. Google cloud sales growth: 43% year over year - Example of strong business fundamentals despite stock weakness. Google total sales growth: 23% year over year - Highlights continued growth at a mega-cap scale. Google buyback authorization: $70 billion - Announced alongside strong earnings commentary. Amazon revenue growth: 7% year over year - Slowest in 20 years, but still positive. Amazon AWS revenue growth: 37% year over year - Supports the bull case that AWS alone has enormous embedded value. Amazon AWS annual run rate: $74 billion - Used to compare AWS revenue scale to large legacy corporations. Apple quarterly revenue comparison: ~#27 on Forbes 500 if annualized - Walter Mossberg quote to show Apple’s scale. Apple since 2003: 39% per year - Illustrates Apple’s extraordinary long-term performance. Robinhood market cap: $9 billion - Used in discussion of fintech valuation collapse. Robinhood cash: $6 billion - Implied enterprise value was much lower than market cap. Robinhood enterprise value: $2.2 billion - Used to argue the stock looked optically cheap despite operational issues. Robinhood monthly active users: 16 million - Down from 21 million at the highs. Robinhood average revenue per user: $53 - Peaked at $137, showing monetization deterioration. Robinhood net revenue: $299 million - Down from a peak of $565 million. ARK fund inflows year-to-date: $908 million to $1 billion - Despite being down sharply, showing persistent believer demand. ARK year-to-date performance: -47% - Illustrates severe drawdown in the strategy. ARK one-year performance: -67% - Further evidence of the magnitude of the blowup. ARK decline from highs: -70% - Used to compare with the NASDAQ bubble-era drawdown. Chipotle revenue growth: 16% year over year - Example of a still-strong consumer brand. Chipotle same-store sales growth: 9% - Shows solid underlying demand. Chipotle digital sales share: 42% - Reflects how much the business model has shifted to mobile ordering. Chipotle new restaurants opened: 51 - Signals continued unit expansion. Household savings rate decline: From 30% to 6.6% - Interpreted as evidence the pandemic savings boom is over.

Pivotal Quotes: "This is no bull market." — Michael/Ben: Opening debate on whether the current environment is a bear market or correction. "The Fed put is transitory." — Ben: Discussion of whether central bank support will return after inflation cools. "Selling is easy... Getting back in is impossible." — Michael: Argument against moving to cash and trying to time re-entry.

Implications: Listeners are being warned to expect lower returns, more volatility, and fewer quick rescues from the Fed. The episode favors staying invested, focusing on business quality, and avoiding panic selling as markets adapt to higher inflation and rates.