Unlike most macro investors who are event-driven, RBA has always strictly followed fundamentals. Our models and indicators have been time-tested in multiple cycles over the past 30 years, and a deliberate and disciplined approach has so far served us well in the current unprecedented environment.

A measured strategy, however, can appear frustratingly slow to some investors during volatile periods because heightened volatility tends to shorten investors’ time horizons. The widespread fear of missing out (FOMO) on a near-term rally after a significant downdraft typically overwhelms fundamental factors. This short-term trading mentality seems to be happening again.

Today’s growing bullish consensus is based, as it is during every bear market, on the thought “the market will be ahead of the fundamentals.” The market, of course, moves ahead of the fundamentals, but the market’s forecasting can be error-prone and currently there is little mention of head fakes, value traps, potentially impotent policies, and significant later-order effects.

Fundamentals, not short-term technicals or FOMO, will ultimately determine the direction of the markets.

3 Stages of a bear market

Historically, there have been three stages to every bear market:

Phase 1. The bear market is temporary and won’t last. The market has already discounted the worst.

Phase 2. The fundamentals are worse than anyone could’ve imagined.

Phase 3. The bear market will never end. The economy will never recover. A “new normal” is forming.

The current bear market seems mired in Phase 1. Investors are increasingly attempting to call the market’s bottom, aggressive positions are more often announced and heralded, and criticism is growing toward more cautious investors. This is normal during Phase 1.

Phase 2 might occur when economic activity doesn’t “normalize” quite as investors expect. The recent Merrill Lynch Fund Manager Survey1 highlighted that 2/3rds of investors expect an optimistic “U” or “V” shaped recovery (see Chart 1). These investors are clearly looking for the economy to “return to normal,” which seems to leave the door open to disappointment.

Phase 3 occurs when investors give up hope. Instead of a majority looking for U or V recoveries, a despondent consensus typically looks for W or L. A “return to normal” is generally replaced with a “new normal.” Such despondency would likely be a very positive sign, but unfortunately still seems distant.