Bear markets are a part of investing. If you told me at the end of 2019, that in a few months we’d have one of the quickest Bear markets that the modern world has seen, then it would recover in a few months – I’d say you’re crazy.
As the markets have recovered from the March lows (and then some in most cases), the economy hasn’t. The global coronavirus pandemic hit everywhere and everything. With cases over 50 million and the death count climbing above 1.2million, this is certainly a once in a lifetime event… we hope. The general population have a hard time grasping that the economy and stock market aren’t related. I wrote a piece on why the market can climb during a recession – check it out here.
There are very few instances where people have not had their daily life impacted by the coronavirus. Even friends that live in the middle of nowhere, tending to their farm were impacted. They were restricted by their town visits (already few and far between) and when they were allowed to shop, they were restricted to the number of items they could buy. Imagine that you used to do your once a week shop, bulking up on all your goods and now you could only buy half of what you normally did. Throws a spanner in the works, doesn’t it? This doesn’t even take into account the number of jobs put on holds, specifically those client-facing roles in hospitality.
Before the decline in Feb/March this year, the market had gone about 11 years with nothing more than a 19% drop – bit crazy. So does that mean bear markets are getting rarer? Or are bull markets lasting longer?
Economic Basics For Bear Markets
It’s a common understanding that stock prices reflect the fundamental performance of a company’s underlying businesses. That means, a business is doing well, the stock price should increase – barring any issues like money fraud or embezzlement etc. So, if the broader economy goes through a recession, shouldn’t more companies see their business fundamentals deteriorate? It was on show with the bear market, where stock prices plummeted… then quickly rose. The economy didn’t get better it’s still teetering on the edge but stocks are crushing their YTD percentages.
Studies have shown that economic recessions are getting less frequent and for shorter periods. In turn, the prices of more stocks will fall, increasing the likelihood of a full-blown bear market. To find a recession that lasted more than two years, you’ll have to go back to the Great Depression. But we can’t just rely on the duration, it’s also the loss of GDP in this.
Don’t look far back for a Bear market
The ones fresh in most people memories (COVID recession and Great recession 2008) didn’t drop more than 15% (for now) and even looking at the previous two before that, takes us into the 1980s… so in only nearly forty years (1980 – 2020) there have been 6 ‘recessions’. One every 7 years on average. This compares to the second half of the 19th century, recessions came on average every four years, and they lasted almost two years on average. The longest recession, which lasted more than five years, happened between 1873 and 1879.
So since 1982, the economy avoided recession for nearly eight years to 1990. Then, the first Gulf War recession happened then the tech boom kicked off the 1990s. That went pop (thanks Y2K bug!!) then everyone’s favourite housing boom, the 2007-09 financial crisis bust.
So for most people under the age of 40, you’ve had it pretty good in terms of profitable trading/investing.
Bear Markets and Recessions aren’t peas in a pod
Recessions don’t always equate to a bear market (and vice-versa). During the mid 20th century, we had 8 bear markets. Only 6 of those were tied to recessions. These took a heavy hit, with an average loss of 30%
But looking at bear markets isn’t fun. Let’s gaze upon bull markets – specifically the two recent bull runs 2002 – 2007 and 2009 – COVID. In the first run, stocks doubled… in the second run, the stock market climbed 400%.
So it seems that bear markets are becoming rarer but they are becoming more violent and volatile. Evident in the COVID fall when everyone knew the term ‘circuit breaker’ where trading would halt if it fell too quickly. Not many traders had experienced this in their lifetime and during the initial fall, it was happening every 2 days.
The 2000-2002 crash, stocks lost about 50% of their value… then it took the $SP500 5 years to reach its previous highs. This year, the market lost 18% in 13 days and 30% in just over a month. To put it in perspective, that is 3 times quicker than the crash of 1929. This year everyone was talking about V-shaped recovery – just as the market dropped violently, it also rose violently. Those lucky enough to invest around mid-March were meet with insane returns over the coming months.
Printer goes brrrrr
Some investors point to factors like the quantitative easing, global economy, central bank intervention, and more optimal management of business cycles by leading companies in trying to explain why recessions have gotten less common. Without government intervention, things would have been certainly worse for the stock market. If only the governments cared more about its citizens and the economy like they do the stock market.
Whilst we aren’t out of the woods just yet (i.e. the can has been kicked along the road) will this downturn prove to be the fastest fall and rise in history? Or will further losses come once the full economic impact of the pandemic becomes clearer?
Fortunately – no one knows this answer – or maybe they do and we’ll see them as the best investor on the planet. My advice is to invest in the long run. Invest with what you can afford to lose and don’t touch your investments for a looooong time.
So what’s the takeaway here? Yes, Bear markets are getting rarer but they are also getting more volatile. We aren’t always going to bounce back like we did this year. Who knows what the next catalyst for a recession will be in 7 years.
The post was inspired by Dan Calinger’s post on Motley Fool – Are bear markets getting rarer?
