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Bazookas, double-barrelled shotguns and bear markets

Mar 19, 2020
The markets are continuing to show significant signs of distress with record falls and bouts of volatility grabbing the headlines. Last Friday saw the tenth largest rise in the S&P 500 since 1928, which followed the worst one-day sell-off in stock markets since Black Monday in October 1987.

This capped one of the steepest weekly drops since the second world war. Meanwhile, currencies have been on a similar rollercoaster with cable hitting levels not seen in 35 years and EUR/USD making 12-month highs and lows in a matter of weeks.

This adverse sentiment is now acknowledging the limited monetary ammunition central banks have, leaving many investors wondering if the gigantic fiscal response in the US and elsewhere can offset the economic damage being done. It can feel like this will never end as every day, we get more red screens and losses. We look at three features of bear markets and try and work out what happens next.

1. General bear market characteristics

The standard definition is a 20% fall from the market peak. Bear markets can be cyclical or secular with the former lasting for several weeks, while the latter can last for several decades. They are generally accompanied by a recession, but not necessarily so. If they are, then this can slow markets from returning to more ‘normal’ rates of return.

The most recent sustained bear market in the US took place between 2007-2009 during the GFC. This lasted 17 months and the S&P 500 lost roughly 56% of its value.

2. Numbers to know (using US stock markets)

  • From 1900-2014: 32 bear markets, 1 every 3.5 years
  • Range of length of a bear market: 6 months to 36 months
  • Average length: 12-14 months
  • Range of losses in a bear market: 20% to 89%
  • Average loss: 33%.

Other historic crises: Black Monday (1987) – 34% / 4 months, Dotcom (2000-02) -49% / 31 months.

3. Recovery?

The median time until recovery across bear markets in the S&P500 is roughly 21 months. The shortest time was 3 months during the early 80s while the longest time taken to recover came during the oil crisis in the early 70s which took around 70 months.

One crucial factor here is obviously the speed of this current market collapse – the fastest on record at just 22 days. The deterioration in markets has also been hastened by the moves in funding markets, which are still showing signs of distress, even after the Fed’s new measures. The aim of these actions was squarely to act as a buyer of last resort and backstop the treasury market, which is a sign of how important this area is and how difficult trading conditions have become.

It is now the speed with which these moves have taken place which are concerning investors, even if we are not yet at the extremes seen in 2008 regarding liquidity issues. The fear that unilateral trends and the Trump administration’s reticence to engage with major global players may mean the central bank plumbing does not run as it should in extreme duress is also playing out.

There is no doubt the dramatic collapses we are seeing will cause longer term damage to the economic system. Confidence levels of businesses have been hit and the severe short-term pain of the recession will become all too apparent. Some consumption will be deferred but much will be lost.

At the moment, fundamentals don’t seriously matter and the dollar as a currency is appreciating regardless of Fed policy moves. But eventually, post-recession growth and the markets will return to normal which means this bear market will end.

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