Breaking Down Bear Markets
At the time of writing this article, the S&P500 had recently entered bear market territory, an arbitrary mark of 20% down from previous highs. When the market was down 17%, it still felt as painful because there are real problems stemming from last year impacting stocks and bonds today.
The other day my wife asked me what a bear market was; now main street is suddenly paying attention to the stock market.
The chart below is the S&P500 where just the sell-offs are measured. If the line reaches 0.0% that means the market is up and creating new highs. By stripping out the up movements, we can visualize the breadth and depth of down years. The gray bars are recessions.
Not every sell-off is the same but is all painful in their own way. A sell-off doesn’t always coincide with a recession either. And oddly, a recession doesn’t always cause a bear market. (See 1960 and 1990)
When the US is in a bear market, it does not mean the rest of the world is experiencing the same thing. Japan’s Nikkei index dominated world markets from 1950-1990. Accessing international markets has never been easier so if the US continues to struggle, like Japan post-1990, there could be other opportunities around the world.
The technical term of a recession is two-quarters of negative GDP growth. I think we can all agree we don’t have to hit a technical recession to confirm how crummy this market is.
Dating back to the 1950s, the average length to the bottom is 354 days. The average amount of time to reach the previous peak is 717 days. As of this writing, this bear market is 170 days old. Assuming this is the run-of-the-mill bear market, we have 187 days left to get to the bottom.
That doesn’t necessarily mean we have much more downside. The past bear markets moved sideways for months or even years. The oil embargo in 1973 started a chain reaction where the market dropped immediately and recovered more than half of the losses by 1975. After which time, the market was mostly sideways until 1980.
The early 2000s experienced the dotcom bust, 9/11 terrorist attacks, Enron, Worldcom, Madoff, and on and on. The bad news kept coming. The market recovered just in time, to be hit again by the Great Financial Crisis.
Now imagine you were contributing to your retirement during the 1970s and the 2000s. Those were the best decades to accumulate assets because prices were so low. In both periods, investors had nearly 10 years to accumulate wealth in time for historically great runs in the 1980s and 2010s.
For long-term investors, I’m not advocating for markets to break so you can buy assets cheaper. But look at it as an opportunity. If your timeline is decades out, you’ll look back after the dust has settled and see this was a great window to take advantage of.
Disclosures:
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
