Part 2: The history on Bear markets

Last update - 18 March 2020 By UserName LastName

With markets worldwide positioned firmly inside ‘bear’ territory, global governments increasing stimulus support in an effort to sustain liquidity and travel restrictions continuing to paint a gloomy picture for international trade, it is important to consider the facts, look at history and assess the possible scenarios before running for the hills.

Amid the bloodbath that has Wall Street sitting in bear market territory, many analysts, specifically Goldman Sachs, took relief in the fact the current rout downwards is event-driven or triggered by a specific catalyst. David Kostin, Goldman’s chief U.S. equity strategist, wrote in a note to clients that when specific events spark bear markets, stock recovery tends to be stronger than it otherwise would be. I felt there was validity in Kostin’s commentary and so looked to assess the statistics on what has happened in the past ‘before’ coming to conclusions.

Firstly, the question needs to be asked; are we in a bear market? Yes, bear markets are measured as a 20% decline from recent highs, but it is only considered the case if they remain low for a ‘prolonged period’ of more than six months. So are we in a bear market now, and if so, how long should it last?

Corrections

Looking at corrections they are reasonably common and going back to 1946, we see that they happen 2.5 times each year on average. Considering this, trying to time the market – buy and sell at the bottom and top – can prove costly. For that reason, while most investors are panicking about the fallout, many seasoned professionals recommend calmness, portfolio rebalancing to ensure any selloffs haven’t skewed your ideal portfolio structure and the continuation of regular contribution to your portfolio. This is particularly relevant for younger investors that have time to recover and are undoubtedly going to see more to come.  Lizz Ann Sonders, chief investment strategist at Charles Schwab, on the matter of timing, said: “investing should never be about a moment in time; it should always be about a process over time”.

 

Bear markets

Considering we are below the -20% threshold that defines a bear market, it seems only right to reflect on bear market events that have occurred over time.

The last bear market was that seen at the tail end of the Global Financial Crisis in which the S&P500 fell more than 56% from its peak before bottoming out. Since then, however, returns have more than quadrupled from March 2009 lows and gained over 300%. So if we are in a bear market, how long it will last seems to be the best question to start with.

How long might a bear market last?

From World War Two onwards, we find that bear markets lasted on average 14 months, and the average decline was 33%. Considering only 14 recessions have occurred in that time, it’s important to remember that bear market status doesn’t automatically mean a recession is looming. Despite that, many look at the current situation as having a high probability of driving the global economy into one.  Assuming a 50-year investment horizon; however, you could expect to live through 14 bear markets and over 91 years of share market history, markets have been rising 77% of the time.

If current conditions don’t improve then it will be the fastest descent into a bear market on record, which history would say is a good thing. Historically, the quicker the fall into a bear market, the shorter the stay. It typically has taken 270 days to fall into a bear market, and when it happened in a shorter time, the average loss was only 26%. The quickest bear market was three months (in 1990 with a -20% decline), and the longest was 61-months ending in 1942 and cutting the index (S&P500) by 60%. In comparison, bull markets have lasted on average 4.5 years since 1942, with the most recent one lasting 11 years.

Missing out

50% of the strongest days on record in the last 20 years have occurred during bear markets, and 30% took place in the first two months of the bull market (the final stage of the bear market). Bull markets often follow bears, and since 1930, 14 bull markets have occurred and, while they usually last for multiple years, a significant portion of the gains typically occurs during the early months. Following each of the bear markets recorded since 1934, the S&P500 has gained 32% on average within a year of finding a bottom with the exclusion of 2008. The tech bubble burst of 2001 saw the S&P500 bottom out at 777 in October 2002 following a 2.4 bear market. Within the first month of recovery, the index gained 15.2%. Similarly, the S&P500 bottomed out at 683 on March 9, 2009, after declining nearly 40%. From that point, it rallied more than 100% over 48 months. By 2015, those that had hung on had made an enormous profit from purchasing cheap during the downturn and gains seen included consideration of positions purchased before the 2006-2007 peak.

Bear and Bull markets compared

Going back to 1960, the average bull ran for roughly six years and delivered an average accumulative return of 200%. The average bear, on the other hand, lasted just under 1.5 years and produced an average accumulative loss of 39%. The most prolonged bear was only over two years and was followed by a five-year bull run.

Case studies

To paint a clearer picture an example has been provided of the bear market that followed the GFC. The official bottom was found March 09, 2009. Looking at a simple transfer into T-bills we are able see the potential impact of avoidance.

Four scenarios

  1. Remain 100% invested in stocks as the market touched its bear-market low and then rebounded
  2. Divert to short-term T-bills for a month after the market bottomed out before returning 100% stock
  3. Divert to t-bills for three months after bottom and then return 100% to stocks
  4. Divert to t-bills for six months after market bottoms before returning 100% to stocks

100% stocks was the best performing three years after markets bottomed but had to stay invested at the bottom. Those that waited for clear skies and took up T-bill allocations until safer days returned participated in the recovery but saw a smaller return

Closing statement

Overall what this article tries to display is that in the grand schemes of things, markets recover, bear markets are significantly shorter than bull markets and often provide strong buying opportunities and present some of the strongest returns. Additionally, because it is hard to time the market, if you can tolerate the volatility and switch off your screen, then statistics show riding out a bear market might be the quickest way to recovery.

We’re definitely not trying to suggest that the market is near its bottom – in fact, the US response has us concerned that the recovery in the world’s largest economy will take some time – but reminding investors that the deterioration of financial markets has been quicker than any in history, and selling at depressed prices when the long-term outlook remains intact is a dangerous strategy in itself.

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