Episode summary
How to Tell a Pullback From a Bear Market
Alpha Exchange
· · 7 min
Summary
The discussion lays out a framework for separating normal market pullbacks from something more serious by using drawdown tiers. The host and guest focus on whether a selloff is likely to stay contained or turn into a recessionary event, with the first tier covering routine 5% to 10% declines and the second tier covering larger “near misses” where recession fears rise but do not ultimately materialize. The guest says the point of the framework is to keep investors calm and make them think in advance about when to buy and when to wait.
The guest argues that once a decline breaks below 10%, markets often do not stop neatly at 11% or 12%; they tend to gap toward 14% and beyond. In that bucket, the guest places episodes like tariffs, the 2010-2011 European debt crisis and U.S. downgrade, and the 2015-2016 industrial and energy slump. Tier three is where a recession actually happens, with average drawdowns around the high 20s to low 30s, while tier four is the catastrophic regime associated with about a 50% loss.
The guest says a study of all drawdowns worse than 10% since 1956 showed a median decline of 22% and an average of 26%, which helped clarify that the difficult 22% type of selloff belongs in the recessionary tier. That realization reinforced the idea that investors need clear mental mile markers before volatility hits.
Key takeaways
- The guest says tier one is a garden-variety 5% to 10% pullback, and that investors should start asking recession questions around 8% to 9%.
- The guest argues that once a decline breaks 10%, it often jumps toward 14% rather than pausing at 11% or 12%.
- Tier two is framed as a recession near miss, with examples including tariffs, the 2010-2011 debt scare, and the 2015-2016 industrial and energy slowdown.
- The guest says tier three is an actual recessionary decline, typically around 27% to 33%, while tier four is closer to a 50% market loss.
- A study of drawdowns worse than 10% since 1956 found a 22% median and 26% average decline, helping classify a 25% selloff as tier three.
Notable quotes
“this is designed to keep you calm in times of crisis, right”
“if you think back to the post GFC world, and I became a small cap strategist in 2007”
“if you break 10, you're going to 14, right? There's not really anything in between”
How the episode opens
You've done some recent work and you've brought in the band Tears for Fears in this analysis. You called it Tears of Fear, meaning just different levels of drawdowns. This is really near and dear to my own kind of market study.
I love thinking about drawdowns, what causes them, how long they take, the damage that's done during them. So you've got four four different tiers. One is I think you called it garden variety, 5 to 10%.
You know, S&P is a 15 to 20 vol asset. It's going to happen, I think, you know, maybe once a year. Nothing really to write home about, but you've talked a little bit more about tier two, which is more significant and rarer.
So walk us through basically the framework and then maybe the the tier two and why you've sort of highlighted that one.
It's a great starting off point and look, I'll say I'll give you my disclaimer, which is this is designed to keep you calm in times of crisis, right? This is this is you know, I think sometimes I show this to people for the first time and they they recoil a little bit. This is really based mostly on my lived experience as a strategist.
Again, starting back in 2000 and you know, kind of what I lived through, right? What I remember best, what I note. And then we drop in, you know, some additional historical perspective along the way.
And so tier one again is the garden variety pullback. We have these all the time. They don't feel great in the moment, but the critical question is do you think we're going to really risk a recession or not?
Do you think that there is something massively out of control that can't be contained?
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- pullbacks vs bear markets
- market drawdowns
- recession risk assessment
- drawdown tiers/framework
- buying during pullbacks
Watch the episode
Watch “How to Tell a Pullback From a Bear Market” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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Alpha Exchange, this episode and its artwork belong to Dean Curnutt. Octagon is not affiliated with the show; this page is an independent summary.
