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Fear the Bear?

“You make most of your money in a bear market, you just don’t realize it at the time.” – Shelby Cullom Davis

The coronavirus-driven equity market selloff since February 19 has been swift and severe. With the sharp downward price action on the S&P 500 on March 9 (driven by virus fears in addition to an oil price crash after Saudi Arabia started a price war), we are now very close to a bear market, 11 years to the day of the Financial Crisis low. A bear market is defined as a 20% decline in securities prices from a recent high. Though painful, equity selloffs of 20+% are relatively common. Since 1928, a bear market has occurred every 3.6 years on average. The last bear market occurred in early 2009, though we came extremely close to a bear market in the fourth quarter of 2018 as recession fears spread. 

S&P 500 Bear Markets

*Bear market defined as 20% or more decline

Peak DateTrough Date% LossNumber of Days**
9/7/192911/13/1929-44.7%67
4/10/19306/1/1932-83.0%783
9/7/19322/27/1933-40.6%173
7/18/193310/21/1933-29.8%95
2/6/19343/14/1935-31.8%401
3/6/19373/31/1938-54.5%390
11/9/19384/8/1939-26.2%150
10/25/19396/10/1940-31.9%229
11/9/19404/28/1942-34.5%535
5/29/194610/9/1946-26.6%133
6/15/19486/13/1949-20.6%363
7/15/195710/22/1957-20.7%99
12/12/19616/26/1962-28.0%196
2/9/196610/7/1966-22.2%240
11/29/19685/26/1970-36.1%543
1/11/197310/3/1974-48.2%630
11/28/19808/12/1982-27.1%622
8/25/198712/4/1987-33.5%101
3/24/200010/9/2002-49.1%929
10/9/20073/9/2009-56.8%517

**Number of days includes weekends and holidays. Source: Yardeni Research.

Importantly, a bear market does not always indicate an economic recession. Indeed, there have been 25 bear markets since 1929, but only 14 recessions during that time (source:  NBER). Prediction markets are currently pricing in above a 60% probability of recession this year (source: PredictIt). Though the path of the virus outbreak is highly uncertain, the U.S. economy is approaching the situation from a relatively strong backdrop with the U.S. labor market remaining strong (at least for the time being) and with housing activity picking up. However, the market itself is a leading indicator, so we must pay proper respect to what it is telling us. We feel the equity market is currently pricing in a mild recession. If a recession were to be avoided, we see scope for equity markets to bounce as concerns begin to subside.

We have had many discussions around what potential catalysts could set a floor for equity markets.  From a policy perspective, these factors include more central bank easing and more fiscal stimulus (potentially coordinated between governments).  From a health standpoint, these factors include a slowing of new cases of Covid-19 (likely at least a few weeks away).  We will be closely monitoring these and other factors in the coming weeks as we continuously re-assess our portfolio positioning.

Originally Posted in March 2020 – Fear the Bear?

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