Let’s hope we’re near the lows of this bear market, but if not, here’s some historical perspective
In early 2009, I sat in on an ill-fated meeting between my parents and their financial advisor.
At that time, they weren’t too far into their retirement, and after watching their nest egg chopped in half by the market losses of the financial crisis, they were panicking.
I made a case for them to remain invested, but their financial concerns, given their lack of active income, ruled the day and they sold a significant chunk of their stocks (fortunately, they didn’t sell everything).
It turned out, this meeting was held just a few weeks before the market-bottom in 2009, from which began the greatest bull market in U.S. history.
In short, my parents’ fears — though entirely understandable — resulted in a financially-injurious decision.
This unexpected, coronavirus-prompted market crash has elicited similar fear in investors. And while I’m not claiming that “don’t sell!” is the wisest move for everyone reading this, I’m willing to bet it’s the right call for most readers.
In today’s Digest, let’s look at this crash objectively in order to get a handle on any fear-based “sell!” impulses, so that we don’t have regrets years from now.
***The numbers behind a bear market
First-things-first, only you know your own financial situation, so the following can’t be applied to everyone. But at a minimum, it will provide some perspective.
Assuming you’re invested in quality stocks, the name of the game in investing is “time.”
Even the most brutal bear market scabs over and heals over with enough time — case in point the bear that ran from Oct. 9, 2007 through March 9, 2009, when the S&P 500 fell 57% … only to then climb 387% before the bear market occurring in the last few weeks.
Time heals all …
***For perspective, since World War II, the average bear market has lasted 14 months, witnessing a decline of 33%
For context, the S&P is down roughly 30% as I write Wednesday afternoon.
We don’t know how low we’ll go during this bear market. Frankly, what we’ve seen so far is the market-guillotine-chop based on fear. What we haven’t yet seen is the full impact of the coronavirus on corporate bottom lines, which will take place over the coming months, perhaps over several quarters. The severity of that will depend on the extent to which our global containment policies are able to address the virus and get the population out spending money again … and that’s simply a huge unknown.
But let’s make an assumption that we can work with.
Last week, Matt McCall, editor of Investment Opportunities wrote to his subscribers, describing the typical recovery cycle the markets experience.
From Matt:
Phase 1: Stocks take the gut punch and pull back.
Phase 2: Stocks move sideways for a few weeks/months. Then stimulus is injected into the economy.
Phase 3: Stimulus starts to take effect and stocks react, rallying big time.
Phase 4: We reach new highs.
We’re in Phase 1 (despite talk of stimulus). And let’s say that we’re not yet at the bottom. We’re going to drop to, call it, 40% losses. That would make this bear market worse than average.
Let’s also say that we don’t begin climbing from this loss until June 2021, 15 months from now. That would make this bear last one month longer than average.
I’m picking next June for two reasons. One, it loosely mirrors historical averages; two, as noted a moment ago, it will likely take some time for the full impact of the coronavirus to work its way through corporate income statements … and it will take some time for a resulting recovery to begin to show up in earnings, which will then drive stocks.
***So, what happens then?
Well, according to a just-released report from Fidelity Investments, in the year after the “trough” of the bear markets since 1929, the S&P 500 has gained an average of 47%.
Let’s put real numbers on that …
Say your portfolio’s starting value is $1,000. This bear market chops it 40%, so you’re down to just $600.
If we follow historical recovery averages, your portfolio could add 47% in the year after the trough. That would bring its value back up to $882.
You’re still underwater, but that’s a good start — and an important reminder that some of the biggest gains after a bear come in those early recovery months, which is why keeping your money in the market to catch those early gains is an important part of your portfolio’s recovery.
What then? How long for time to “heal all” as we referenced earlier?
Well, in 2009, after declining 57%, the S&P roughly doubled in the following 48 months. And if we simply look at the S&P chart, we’ll see it took about four years to climb back to 2008’s highs after the 2009 low.
If we use all of this as a loose proxy, that means we may see “Phase 2,” as Matt calls it, last until next June. (This could change as we’re already hearing about a $1 trillion stimulus package. That said, we haven’t contained the virus yet so there’s likely more economic damage coming before stocks begin a sustained recovery.)
At that point, we’d hit the vigorous recovery of Phase 3. Using the 2009 bear as our example, we would rally hard for 4 years before hitting new highs. But our estimation of a 40% decline isn’t as bad as 2009’s 57% decline, so let’s call it two/three years of recovery before we’re back to all-time highs.
Now, this is just a crude base case. The reality?
Who knows? If our governments can get a handle on the coronavirus soon, we might avoid the brunt of the feared economic damage and see a comeback, putting us back to all-time highs more quickly.
While that would be wonderful, this Digest is about setting realistic expectations so you don’t make a fear-based decision you later regret.
So, while a recovery could happen at a faster pace, if we use our base case, we’d be looking at about three/four years from today until we get back to all-time highs (a year of sideways consolidation then two/three years of bull market). Again, it could be quicker, but if we’re looking at all possibilities, ask yourself — given your age, finances, and goals, can you absorb this timeframe?
Sure, it won’t be fun — or even easy — but if you’re in quality stocks, are you able to sit back and trust that time will heal all?
***Just weeks ago, many Digests focused on the massive trends that will be reshaping our world this decade and the investment gains that will come from them
Driverless cars, 5G connectivity, artificial intelligence, precision medicine, robotics, just to name a few …
None of that has changed.
Actually, that’s not true …
The price tag to be a part of these massive trends has now gotten cheaper.
Now, could it become cheaper still?
Absolutely. And objectivity and preparation dictate that we be mentally prepared for that.
But the right question to ask ourselves isn’t necessarily “will stocks sell-off more?” but instead is “ten years from today, will we look back at now as a great time to have either stayed invested or invested more?” (Again, assuming you’re in quality stocks.)
Let’s return to 2008/2009 …
Say you timed it poorly, and sunk a chunk of cash into the S&P on November 3rd, 2008. As you can see below, you had another 30% loss ahead of you.
Well, if we fast-forward 10 years, your return was 183% … and that’s including this 30% loss.
Plus, as we noted in yesterday’s Digest, there’s no need to feel you must put all your money in at once during this bear market. In fact, adding to your positions in small allocations over a period of weeks and months will be a great way to ensure you take advantage of whatever discounted prices come — while enabling you to ride the recovery whenever it happens.
As we wrap up, let’s hope that we’re near the low of this bear market. But if not, if it goes lower and stretches on, watch your emotions. And as you do, remember the historical average numbers related to bear markets and subsequent recoveries.
Most important, don’t let short-term fears derail long-term goals. Let my parents serve as a cautionary tale for you.
Have a good evening,
Jeff Remsburg
