Bear markets get rid of a lot of malinvestment and other bad decisions. From Lance Roberts at realinvestmentadvice.com:
One of my favorite writers for the WSJ is Spencer Jakab, who recently penned an article explaining why a bear market is not necessarily a bad thing. He starts with a quote from “The Godfather.”
““These things gotta happen every five years or so, ten years. Helps to get rid of the bad blood…been ten years since the last one.”
In today’s markets, mentioning the “B-word” will get you thrown into the “permabear” camp, and everyone immediately assumes you mean the end of the world: death, disaster, and destruction. Unfortunately, even the Federal Reserve and the Government also believe bear markets “are bad.” As such, they have gone to great lengths to avoid bear markets and recessions through massive interventions and zero-interest-rate policies.
Yes, bear markets are indeed destructive, as they reverse the “wealth effect.” People lose their jobs as economic demand declines, weak companies go out of business, and consumer sentiment declines. However, sometimes destruction is a “healthy” thing, and there are many examples we can look to, such as “wildfires.” Like a bear market, wildfires are a natural part of the environmental cycle. They are nature’s way of clearing out the dead litter on forest floors, allowing essential nutrients to return to the soil. As the soil enriches, it enables a new, healthy beginning for plants and animals. Fires also play a vital role in the reproduction of some plants.
However, just as the Federal Reserve has tried to stop bear markets, California has had similar negative results from trying to prevent wildfires, as noted by MIT:
“Decades of rushing to stamp out flames that naturally clear out small trees and undergrowth have had disastrous unintended consequences. This approach means that when fires do occur, there’s often far more fuel to burn, and it acts as a ladder, allowing the flames to climb into the crowns and takedown otherwise resistant mature trees.
Yes, bear markets have terrible short-term impacts, but they also allow the system to reset for healthier growth in the future.
