I saw three bears near my home last week.

Photo: Ron Shawley. Source: Wikipedia. CC-BY-3.0

It was a mama-bear and two cubs. They were crossing the road right outside my house, and I had to come to a complete stop to avoid hitting them. They’ve been visiting the apple trees in my front yard this fall, getting ready for the winter. The cubs are really cute. Seeing them put me in mind of an old saying about bear-encounters in the wild:

If it’s black, fight back;

If it’s brown, lay down;

If it’s white, good night!

There’s a lot of common sense conveyed by this saying. Black bears are shy. Black bears in the northeast usually avoid people. If they do make contact, it’s often because people acclimatized themselves, by leaving trash out or by approaching the bears or by taking some other action. A few years ago, a resident of my town in New Hampshire regularly left out a dozen doughnuts for a local bear. That bear became a neighborhood nuisance when the doughnut donor moved away!

A few years ago my daughter was hiking in the Sierra Nevada mountains of California when a black bear raided her camp in the middle of the night. She and her camp-mates yelled and banged pots and the unwelcome camp-intruder scampered off. The bear wasn’t looking for trouble, just some munchies it smelled in her pack.

Brown bears are a different story. A friend of mine was trout-fishing in Alaska when he had an up-close encounter with a brown grizzly bear. He was hiking from his campsite to their fishing site (saying “Hello, bear!” as he went along) when he heard several loud “snorts” nearby while a couple of brown cubs scampered up a tree. The mama bear then sham-charged him *three* times. He later told me that he was TERRIFIED. While we sometimes discuss our “fight or flight” response to threats, in this case he called it a “fight, flight, or freeze” reaction, and he clearly had the “freeze” response. He said that there was NO WAY he was able to move a muscle, while the sow stood up on her rear legs to get a better view of him. And she looked about 12 feet tall!

Photo: National Park Service. Public Domain.

Lying down and playing dead is a reasonable response to a mother grizzly with cubs, since she often just wants to get her offspring off to safety. But it doesn’t work, according to the website “bearsmart.com,” with a predatory bear. And polar bears, the white bears of my bear-sense saying, are frequently predatory. Hungry polar bears are unpredictable, fearless, and stealthy. The only reasonable defense against a polar bear is a high-powered rifle. That’s why the saying says good night: it’s good night, either for the human or the bear.

The same bear-wisdom can be applied to bear markets, and we’ve been in a bear market all year. What kind of bear market is this?

A black-bear market is one that investors can “fight.” It’s like the bear markets of 2011 (the Euro crisis), or 2018 (the Fed’s initial tightening), or the 2020 Covid crisis. The bears run away when the government mounts a coordinated policy response. The Euro crisis was effectively over when European Central Bank chief Mario Draghi pronounced that the ECB would do whatever it takes to preserve the Euro as a common currency. Fifty years ago, Marty Zwieg coined the famous phrase, “Don’t fight the Fed.” An investor in a black-bear market counts on the Fed and fiscal authorities to bring out their bear spray.

A grizzly bear market is a long, rolling downturn. It’s a bear market that involves fundamental problems in the economy or where the authorities stay away, or even act contrary to what the markets expect. It’s a market that where there is no governmental “put” that allows investors to take risks that the government would fix later on if they didn’t work out. For years stock market investors counted on the Fed to ease monetary conditions if the economy slowed significantly – a “Fed put.” A brown bear market is one that investors want to sit out, like the Global Financial Crisis or the dot-com crash.

A polar bear market is one that actively hunts for investors. I’ve never seen one in my lifetime, and hopefully never will: Russia 1918, Germany and Japan 1945, Argentina 1990. It’s a market and economy that is devastated by war, revolution, or hyperinflation. Sometimes all three. In such an economy, the only successful strategy is to get away!

Polar Bear warning. Photo: Bjørn Christian Tørrissen. Source: Wikipedia. CC-BY-SA-3.0

Many started out in this bear market thinking that the Fed would have their back. After all, they did an about-face on monetary policy back in 2018. But that was before inflation turned out to be far stickier than most folks expected. That was before Chair Powell gave his “Keeping At It” speech in Jackson Hole. That was before the Fed’s most outspoken proponents of easier monetary policy became even more outspoken monetary hawks.

Concern over a potential inflationary legacy has transformed our Fed from being a shy and timid black bear into acting like an aggressive grizzly. It doesn’t seem likely at this point, however, that they’ll adopt the white coats of polar bears. As investors, however, we need to be “bear-aware.” Most bear encounters are harmless, even with grizzlies, as my friend could attest. After his heart settled down, he went on to fish at his favorite spot. But the memory of that encounter stays with him – just as the memory of *this* bear market will stay with us.