How Long Could A Bear Market Last?
It’s a bear market. That’s the most important news.
Yes, coronavirus caused the decline.
Yes, there is most likely a recession coming.
Those factors are important. But, as investors, the primary factor we need to consider is the fact that we are in a bear market.
The Dow Jones Industrial Average is the benchmark index for defining bear markets. One reason for this is the Dow’s long history, which dates back to the late 1890s.
All that history is helpful for placing the current market into a historical context. For example, looking back through history, we know that this is the 15th time the Dow has declined at least 30% since 1900.
We also know that the median decline was 45%, and the median length of time was 86 weeks (about 20 months).
The major exception is the 1987 bear market, which only lasted eight weeks. However, I don’t believe our current decline is similar to that crash.
For one, the 1987 crash was not associated with a recession. The cause appeared to be related to market structure.
At the time, the idea of portfolio insurance became popular. This strategy used futures contracts on market indexes to, in theory, limit the losses of a portfolio. As the index declined, investors in this strategy sold futures contracts, and the profits from those sales offset the losses in the stocks.
For a time, the strategy worked. In 1987, it failed miserably. As prices fell, traders sold more and more contracts in the futures markets. That pushed prices down more. As a result, stocks kept falling and a downward spiral developed.
Prices stabilized after the crash. It took 89 weeks for prices to fully recover their losses. That was the fastest recovery from a 30% decline in history. On average, it takes 207 weeks to recover from a decline of this size. That’s almost four years.
There is one historical reference point for this market. It’s 1929. In that bear market, a 30% decline took just 15 weeks. The chart below shows that decline along with the current market.
Prices have fallen more than 30% in less than five weeks. That’s a new record. And the prospects of a rapid recovery are slim.
In fact, history tells us there is most likely more downside. Markets have bottomed, on average, 16 weeks after they fall by 30%. They lose an average of 17% over that time.
I know I have thrown a lot of numbers at you today, so let me sum up: After falling 30%, stocks usually fall another 17% over 16 weeks. If this is an average bear market, we should be looking for a bottom in July.
Now, let’s consider coronavirus.
Is This Time Different?
In 1929, the bear market was so bad because the economy slipped into a recession and then a depression. The economy contracted quickly as international credit markets crumbled, trade wars developed in response, and companies closed as they lost business. I’m simplifying a complex process, but the speed of the change was unprecedented.
Coronavirus has pushed the economy off a cliff. The data is slow to capture the magnitude of what’s happening.
One source of data we have shows that hours worked by employees in small businesses around the country have dropped by about 39%.
This is a deep economic slowdown. An estimated 44% of hourly employees are not going to work, which could indicate that unemployment has doubled over the past two weeks. The steep drop in stock prices reflects the damage in the economy. Since we don’t know how deep the economic contraction will be, there is no reason to expect the stock market to bottom right now.
Action To Take
A word of caution for value investors: Some stocks are looking extremely attractive at current prices. However, 59% of the 6,101 publicly traded companies don’t have enough cash on hand to meet their current liabilities. Many companies cannot weather an extended lockdown, and sales are only dropping.
Until we see some news about extensive economic support, don’t believe anyone who tells you the bottom is in. Even though things look cheap now, I believe there will be better prices for long-term investors in many stocks over the next few weeks.
Until then, we’ll keep following our tried-and-tested “buy” and “sell” signals.
The good news is that there are simple techniques we can use to survive — and even thrive — during times like this…
For example, my colleague Jim Fink has devised a proprietary investing system that works in any market. That includes a three-and-a-half-year winning streak in which his followers have raked in tens of thousands of dollars… without a single loss.
Jim just agreed to show 500 smart investors how it all works. And if you want to join his group, you’d better act now because spots are going fast. Go here to learn more.