Bear Market Facts

March 12, 2020

As certainly as day follows night, the onset of a bear market will elicit advice from your financial adviser not to panic because equities always prove to be lucrative in the long run. All one needs is a well-balanced portfolio and some patience to wait out the market hysteria. Much of the time, the reassurance is well-taken, but never isn’t forever, and neither is always a certainty.

Tell that to the Japanese, for instance. The most watched index of Japanese equities, the Nikkei 225, closed at 38,916 on the final business day of 1989, December 29th. Thirty years and 72 days later, the Nikkei closed today down 52.3% weaker than then at 18,560. If such a span  — the difference between being aged 30 and aged 60 — doesn’t constitute a long-term block of elapsed time, then what does?

Another myth admonishes against using the Dow Jones Industrials as a U.S. stock market measure because it embodies too few companies to be representative, and that can be true of short periods but less so when comparing more distant points of time. I happen to like the DJIA because one has more than a century of data. It so happens that today saw very similar declines in the the DOW (10.0%), S&P 500 (9.5%) and NASDAQ (9.4%), and it so happens that the shot groups of cumulative losses from bull market closing highs last month is even tighter: 28.3% from 29,556 on February 12th in the DOW, 26.6% from a close of 3,380 in the S&P on February 14, and also 26.6% from the NASDAQ’s close of 9,817 on the 19th.

Bear markets are defined as peak to subsequent low drops of 20.0% or more. The average properties associated with a post-WII bear market in the S&P are a duration of 14 months and a drop of 33%. If the current market ends up being typical, that suggests that this one runs for somewhat more than 13 months further but that four-fifths of the entire downswing has already occurred, and this appears highly doubtful. The coronavirus pandemic was the catalyst of this bear market, but global growth was already slowing when this factor emerged. The science of the disease suggests that now is closer to the beginning than the end and probably by a large margin because it will be over a year before a vaccine is developed, tested, and ready for widespread use. The pandemic will exert an enormously disruptive shock on both demand and supply. It is present on a global scale and is fraught with all sorts of unanswered questions. An equally large reason for being pessimistic about the future epidemiology of the pandemic is that it catches the world at a time of particularly inept political leaders and populist-leaning people more comfortable with nationalist solutions than ones requiring nations working together.

The United States has experienced a number of  bear markets that were longer and of much greater magnitude than 14 months and 33%. The mother of all bear markets was associated with the Great Depression that saw the DOW drop 89% from 381.71 on September 3, 1929 to 41.2 on July 8, 1932. Not until the 1950s was the pre-depression level reattained. More recently in the Great Recession, the DJIA lost 53.8% from 14,165 on October 9, 2007 to 6,547 on March 9, 2009. During the first oil price shock and Watergate , the DOW fell 45.1% from 1,052 on January 11, 1973 to 578 on December 6, 1974. Between December 3, 1968 and May 26, 1970, the market fell 35.9%, and a brief bear market from August 25, 1987 to October 19, 1987 encompassed the all-time greatest daily drop and accumulated to a decline of 36.1% in all. If you’re sensing a political pattern, good for you. Each of these examples happened when a tax-cutting Republican was president.

Today’s market closing in the DJIA was the weakest since June 6, 2017, and  the NASDAQ is at its lowest close since January 10, 2018, shortly after Trump’s tax bill was passed.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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