“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 Date||Trough Date||% Loss||Number of Days**|
**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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