Thursday, March 12, will be remembered as the day the longest bull-market in U.S. stock market history officially ended. During this 11-year run, the S&P 500 rallied about 400% in total return from the lows of 2009, generating annualized returns at a clip of approximately 15% per year. As the proverb goes: all good things must come to an end. We know from previous market trends, proceeding every bull market must be a bear market. A bear market can be defined as a sustained period of downward trending stock prices that begins when stocks decline 20% from their all-time highs. Following the close on March 12, the S&P 500 is now down nearly 27% from its all-time high recorded just a few short weeks ago. While no two bear markets are ever the same, this one feels quite different with respect to the timing. There is no housing market collapse, banks have healthy balance sheets, and unemployment is near record lows. There are no greedy bankers or reckless lenders to foot the blame, and a highly contagious virus is not something that can be “cured” by bailing out hedge funds, lowering interest rates, or injecting liquidity into the system. This is something different, an exogenous shock.
Governments around the world are limiting large events, and advising people to avoid all but necessary interactions. Colleges are sending students home for the remainder of their academic year, major sporting events are cancelled, and international travel is being largely halted, to name a few steps taken to limit the spread of the virus. What’s disturbing for some, is not the cancellations and postponements, but the lack of any real guidance on a timeline or the duration of social distancing. Without question, we know the airline and travel companies are going to face significant hurdles; some sort of bailout or relief package seems imminent. Oil companies are facing two major headwinds: weakening demand as a direct result of the virus, and an abundance of supply amidst a price war between Saudi Arabia and Russia. Oil prices have fallen more than 50% in the wake of the coronavirus, and we can expect to see many of the highly leveraged exploration and production companies (particularly U.S. shale producers) face significant financial challenges. Many manufacturing companies entered this pandemic in already delicate situations following the U.S.-China trade war and will be facing an increasing amount of difficulty sourcing materials through already-disrupted global supply chains.
However, the strength of the U.S. economy in recent years can be largely attributed to the resilience of the consumer, who accounts for roughly two-thirds of total spending. One of the most important considerations related should be the impact all this will have on the U.S. consumer. Labor markets have been strong and provided a significant backdrop for consumers to feel confident in spending their dollars, and in turn, keeping the wheels in motion for the economy. In the wake of this pandemic-induced economic slowdown, jobs are going to be lost, and consumers are going to become less comfortable spending money on all but necessities. On the positive side, the U.S. economy is entering into this pandemic from a relatively healthy (economically speaking) position. In a general sense, employers should be in a good position to sustain some shorter-term supply and demand shocks. The strength of the economy leading up to this slowdown should also have the average consumer in a position where they too can absorb some short-term loss of wages, although this will vary considerably between individuals.
Policymakers have found themselves at somewhat of a crossroads between what the health experts say needs to be done, and what is best for the economy. The Centers for Disease Control and Prevention (CDC) has explicitly stated that to curb the outbreak and flatten the curve (the pace at which individuals are infected), economic activity must ultimately come to a stand-still during the next few months. On the other hand, monetary and fiscal stimulus is designed to help bolster economic activity – contradictory to what needs to be done to fight this virus. Regardless of monetary or fiscal policies, an economic slowdown is likely inevitable. However, the goal of the monetary policies undertaken by the Federal Reserve in recent days is not to spur economic activity, but to provide stability and liquidity to the financial markets. While lowering interest rates and purchasing securities in the open market will not help cure this virus, it will help to ensure our financial markets remain viable during this pandemic. These actions should go a long way towards ensuring our markets and economy are in a healthy position to promote economic growth once this virus has passed. The same can be said for any fiscal stimulus that the administration approves in the coming days. This will not be aimed towards spurring immediate economic activity but assisting employers and employees in weathering the storm.
The stock market is forward looking, and the sheer number of unknowns at this point means that from a market standpoint, things could get much worse before they get better. The wide range of possible outcomes for the coronavirus leaves nothing to the imagination, and any attempt for us to try and predict how this pandemic will ultimately unfold would be irresponsible at best – we will leave that to the global health experts. What we can do, is look at the facts, and use history as a guide for how this will most likely impact the markets and our investments going forward.
Ben Carlson, a well-respected author, blogger, and fellow investment professional recently conducted some research on the history of bear markets. According to these findings, the U.S. stock markets have endured 24 bear markets since 1928, or about one every four years. On average, stocks have fallen 33% during these bear markets, and they tend to last just about one year in terms of duration. While these findings show bear markets are much more common than we might think, they certainly don’t make the last few weeks any easier to stomach.
In terms of length of bear markets, every case is different, and there are extremes on both sides, but one fact we may find encouraging is half of all bear markets have returned to break-even levels in less than one year. In most recent history, the recovery following the Great Recession took 3.1 years. This may seem like a very long time but considering the magnitude of that sell-off (-56.8%), markets had to rally 131.3% in the 3.1 years following the Great Recession to reach break-even levels, an even more impressive feat. There is no guarantee this bear market will be anything like we’ve experienced in the past. An eventual recovery could come much faster or take significantly longer than historical averages. Theoretically, the stock market is currently discounting several years of corporate earnings, while many economists don’t expect this pandemic to have much of an impact on earnings beyond the next year or so. There is no way for us to determine if or when the market has bottomed out. The good news is that throughout history, every bear market has been followed by a bull market. From a long-term perspective, every day the markets move lower, valuations become more attractive, and future expected returns are anticipated to be higher.
Oftentimes, one of the biggest challenges we face during times like this is our self. The decisions made during volatile market environments can ultimately determine whether long-term financial objectives are achieved. The most crucial component to achieving these goals is not choosing the right stock or timing the market, but developing and adhering to a well-constructed, rules-based financial plan that’s centered on long-term goals. Having an appropriate plan in place can help to eliminate counterproductive, emotionally driven decision making. A well-constructed financial plan ensures each person’s time horizon, risk tolerance, and any other unique circumstances are taken into consideration when building investment portfolios. Financial planning takes into consideration the uncertainty associated with investing and recognizes that bear markets are going to occur. Throughout this process, nothing is left unaccounted for, and once a plan is put into place, individuals can rest-assured knowing they are on the right track, regardless of how the markets perform over the short-term. Financial planning allows a more clear vision of the big picture, accounting for all the what-ifs in life, and avoiding the trap of making irrational decisions based on fear and emotion; rather, follow the path their financial navigation partner has clearly defined for their personal situation based on knowledge, discipline, and a common shared vision for reaching long-term financial goals.
This communication is for informational purposes only. It is not intended as investment advice or an offer or solicitation for the purchase or sale of any financial instrument.
Indices are unmanaged, represent past performance, do not incur fees or expenses, and cannot be invested into directly. Past performance is no guarantee of future results. 1584638826449