The U.S. (and indeed most of the world) has seen stock markets enter bear territory, which is defined as a 20% or more decline from the previous bull market high. The S&P 500 index is usually used as a proxy to date bear markets in the U.S.
The U.S. Bull market (as per the S&P 500), which started on March 9, 2009, ended on Feb 19, 2020. On March 12, 2020, a new Bear market was born.
Following is a graphic from First Trust showing a history of U.S. Bear and Bull markets (current to the end of 2019).
Source: First Trust
Here is a description of the graphic from the First Trust website:
"This chart shows historical performance of the S&P 500 Index throughout the U.S. Bull and Bear Markets from 1926 through 2019. Although past performance is no guarantee of future results, we believe looking at the history of the market’s expansions and recessions helps to gain a fresh perspective on the benefits of investing for the long-term.
• The average Bull Market period lasted 6.6 years with an average cumulative total return of 339%.
• The average Bear Market period lasted 1.3 years with an average cumulative loss of -38%."
Source: Bloomberg, Turner Investments
Given that we were approximately 27% below the high as of Thursday, March 12th, we likely still have some ways to fall. However, we can say that this is the fastest conversion from a Bull market to a Bear market in U.S. history.
Why did the market fall so much and so fast? It's hard to say for certain, but what triggerred it was a combination of panic caused by the novel coronavirus (Covid-19) and the outbreak of an oil price war between Saudi Arabia and Russia and the unraveling of myriad leveraged long positions lulled by the long bull market. The selling on March 12th was indiscriminate; stocks, gold and investment-grade bonds were all sold in a rush for liquidity. The bond spreads widened suddenly as investors considered liquidity concerns about below investment grade borrowers.
Source: Moody's Seasoned Baa Corporate Bond Yield Relative to Yield on 10-Year Treasury Constant Maturity
Company earnings per share are likely to be severely hit as the effects of the virus and quarantine efforts cascade through the economy. Looking at the past two recessions, during which the S&P earnings per share dropped and the price-earnings ratio paradoxically shot up.
No one knows how long the Covid-19 epidemic will continue, or what its ultimate impact on the economy will be. The news will likely get worse before it gets better.
It seems obvious to me that a recession is virtually certain, but we’ll have to await the numbers for confirmation. How deep will it be and how long it will continue is a matter of pure speculation. Optimists are hoping for a V-shaped recovery. That’s based on the theory that this virus, like influenza or the the common cold viruses that it is related to, will be slowed by the advent of warmer weather, and the economy will snap back in the second half.
Pessimists see the virus continuing to spread, causing an a shutdown in most parts of the world that continues for many months with a second wave of infections starting in the Fall. There is no cure for the virus currently, and vaccines and drugs seem to be at least a year away. Social distancing policies will extract a heavy cost from the economy. Many small businesses will likely go under. The service and the gig economy (esp. restaurants, tourism, entertainment and travel) will be decimated.
Source: The Economist.
In the face of such uncertainty, I think its best to adopt a middle ground, informed by your circumstance. However, remember that at some point, the Bear market will end. Solid companies that can survive hard times will still be in business and their stocks will be selling at rock-bottom prices. Looking back at the financial crisis in 2007-09, investors who held on were richly rewarded when the stock market rebounded. Those who locked in losses took years to recover, and some never did.
If you are young or middle age and have secure employment, there will be a great opportunity to pick up solid investments on sale prices. If you are retired or nearing retirement and are well diversified across asset classes, you will also be fine. Over the next few months, you can start to rebalance selling some bonds and fixed income and picking up high-quality stocks.
Apart from speculation, I think its a bit too early to start buying in earnest. Before buying agian, I would at the following indicators to gauge recovery:
- A topping off of increases in new cases of Covid-19 infections in the U.S.
- Sustained rise of the S&P 500 of at least 20 percent from the bottom AND a decrease of the VIX (CBOE Volatility Index) to below 30.
- Company earnings starting to normalize from the shock.
However, whatever you do, I hope you and your family can stay healthy and pay the bills.
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