We’ve all heard of bull and bear markets, but what about an eagle market or a wolf market – not so much, right? Well, according to one industry professional, there are actually four market environments, not just the two we all love to obsess over when the market turns.
Jesse Mackey is chief investment officer of 4Thought Financial Group in Syosset, N.Y. Mackey has been subscribing to this theory since 2010, applying it to his own clients and even sharing his insights about this still-growing approach in the June issue of the Journal of Financial Planning.
This way of explaining the market matches the current market conditions with investments that are better-suited to handle those conditions. In short, when the wind of the market changes direction, so should the investment strategy.
This new method is eye-catching, but Mackey believes it’s better able to serve modern clients than the usual bull-bear perspective.
“Everyone’s used to the traditional way of managing money,” said Mackey. “Using this approach can be superior.”
Mackey said he was motivated also by the data and the superior risk-adjusted returns he saw in this new strategy shortly after the Great Recession dimmed Americans’ financial picture.
“We’ve actually built our entire money management program around this concept,” he said.
Mackey calls the transition to this method “perpetual” in nature because he and his colleagues educate investors on the four-market perspective when they decide to work with 4Thought.
The four market environment looks like this:
A bear market is any market with 20% cumulative decline (same as traditional definition) from the most recent record peak.
Characteristics of a bear market – Weak productivity, low disposable income, overall sluggish economy.
Notable bear markets – Nine bear markets in S&P 500 in 68 years. For example: December 1961 – June 1962; November 1968 – May 1970; March 2000 – October 2002; October 2007 – March 2009.
Performance & investment – Liability-driven investments do best.
Mackey says: “Everything for a bear market is the same. It’s the only one that’s exactly the same as the traditional definition.”
From trough of bear market until next record peak (traditional definition). Any period that does not meet the criteria for a bear market.
Characteristics of a bull market – Positive investor sentiment, rising stock prices.
Notable bull markets – There were 10 bull markets in the S&P 500 from 1950 – 2017. For example: August 1982 – August 1987; December 1987 – March 2000; October 2002 – October 2007.
Performance & investment – Strategic asset allocation (modern portfolio theory).
Mackey says: “By the traditional definition, anything that is not a bear market is a bull market. They’re mutual exclusive in that regard. There are other ways to define it though. When we start including the concept of a wolf market and an eagle market, now there are a couple different ways you can define those.”
An eagle market is any period exhibiting no correction of 10% or greater and trailing one-year returns 30% or greater. An eagle market is a subset of bull markets.
Characteristics of an eagle market – Lower volatility.
Notable eagle markets – 24 eagle markets occurred in S&P 500 from 1950 – 2017. For example: October 1962 – October 1963; December 1974 – July 1975; October 1990 – January 1992; November 2012 – December 2013.
Performance & investment – Concentrated value investing methods do best. These include private equity funds.
Mackey says: “Return chasing in an eagle market actually works.”
Subset of bull market. A wolf market is defined as the point of a bull peak to trough of correction, not more than 20% decline. Correction and return from correction.
Characteristics of a wolf market – Heightened volatility.
Notable wolf markets – 20 wolf markets occurred in S&P 500 from 1950 – 2017. For example: August 1962 – November 1962; September 1976 – August 1979; October 1983 – November 1995; May 2015 – July 2016.
Performance & investment – Methods that capitalize on volatility like hedge funds and tactical asset allocation.
Mackey says: “With the right strategy, investors can capitalize on volatility in a wolf market rather than being a victim of it.”
Born out of the great recession, this method adapts to market changes so that investors don’t just survive market turns, they thrive in them.
Mackey urges advisors not to discount this unique perspective until they’ve done the research.
“Once you see the data, it was a non-brainer for us to pursue it.”
AdvisorNews Managing Editor Cassie Miller may be reached at cassie.miller@Adnewsfeedback.com. Cassie has an extensive background in magazine writing, editing and design. Follow her on Twitter @ANCassieM.