After reaching a historical high on 19th February the US sharemarket, as measured by the S&P 500 Index, recorded:
- Its fastest correction from a peak, a fall of 10% but less than 19%, taking just 6 days; and
- Its quickest period to fall into a Bear market, a fall of greater than 20%, 21 days.
The S&P 500 entered Bear market territory on March 12th, when the market fell 9.5%, the largest daily drop since Black Monday in October 1987.
The 21 day plunge from 19th February’s historical high was half the time of the previous record set in 1929.
This follows the longest Bull market in history, which is a run up in the market without incurring a 20% or more fall in value. The last Bear market occurred in 2008 during the Global Financial Crisis (GFC).
The 11-year bull market grew in tandem with one of the longest economic expansions in US history, this too now looks under threat with a recession in the US now looking likely over the first half of 2020. Certainly, global recession appears most likely.
Global sharemarkets around the world have suffered similar declines, some have suffered greater declines, particularly across Europe.
Markets lost their complacency mid-late February on the spreading of the coronavirus from China to the rest of the world and after Chinese manufacturing data that was not only way below expectations but was also the worst on record.
A crash in the oil price, which slumped more than 30%, added to market anxieties.
The recent period has been one of extreme market volatility, not just in sharemarkets, but currencies, fixed income, and commodity markets.
As the Table, courtesy of Bianco Research, below highlights, three of the five days in the week beginning 9th March are amongst the 20 biggest daily gains and losses.
After the 9.5% decline on 12th March, the market rebounded 9.3% the following day. The 7.6% decline on the 9th March was, to date, the 20th largest decline recorded by the S&P 500.
2020 is joining an infamous group of years, which include 1929, 1987, and 2008.
Where do we go from here?
Great question, and I wish I knew.
For guidance, this research paper by Goldman Sachs (GS) is helpful: Bear Essentials: a guide to navigating a bear market
To get a sense as to how much markets are likely to fall, and for how long, they look at the long-term history of the US sharemarket. They also categories Bear markets into three types, reflecting that Bear markets have different triggers and characteristics.
The three types as defined by GS are:
- Structural bear market – triggered by structural imbalances and ﬁnancial bubbles. Very often there is a ‘price’ shock such as deﬂation that follows.
- Cyclical bear markets – typically a function of rising interest rates, impending recessions and falls in proﬁts. They are a function of the economic cycle.
- Event-driven bear markets – triggered by a one-off ‘shock’ that does not lead to a domestic recession (such as a war, oil price shock, EM crisis or technical market dislocation).
They then plot US Bear Markets and Recoveries since the 1800s, as outlined in the following Table:
Source: Goldman Sachs
From this they can characterise the historical averages of the three types of Bear markets, as outlined at the bottom of the Table:
- Structural bear markets on average see falls of 57%, last 42 months and take 111 months to get back to starting point in nominal terms (134 months in real terms (after inflation)).
- Cyclical bear markets on average see falls of 31%, last 27 months and take 50 months to get back to starting point in nominal terms (73 months in real terms).
- Event-driven bear markets on average see falls of 29%, last 9 months and recover within 15 months in nominal terms (71 months in real terms).
In their opinion GS currently think we are in an Event-driven Bear market. Generally these Bear markets are less severe, but the speed of the fall in markets is quicker, as is the recover. However, as they note none of the previous Event-Driven Bear markets were triggered by the outbreak of a Virus, nor were interest rates so low at the start of the market decline.
Therefore, they conclude, a fall of between 20-25% can be expected, and the rebound will be swift.
This makes for an interest couple of quarters, in which the economic data and company profit announcements are sure to get worse, yet equity markets will likely look through this for evidence of a recovery in economic activity over the second half of this year.
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