The 2020 Bear Market: Hibernation Ended Early?
2020 Bear Market (so far) vs. all Bear Markets since 1950, per the analytics & charts
By Adrian Buchanan on Thursday May 7, 2020 (reviewed by respected peers)
As you probably know, the stock market is currently in a Bear Market. Or is it? To better answer this, in hopes of identifying possible patterns and/or trends, I studied the S&P 500 during the previous seven significant bear markets since 1950 in great detail. This is not a think piece or opinion based editorial; this is a summary of my interpretation of the historical data based of both an analytical and observational study.
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The tricky thing with being in the midst of a bear market's recovery, is a lack of the necessary hindsight one needs to accurately identify a true bottom (or end) of a bear market. Participants of a market do not usually know the bear market is officially over, until it is actually over. That sums up the difficulty investors face in trying to predict the bottom of a bear market. It is an environment where investors need to practice risk management but also want to take advantage of the assumed price discounts.
"Men lie, women lie, numbers don't." - Jay-Z
The most difficult aspect of attempting to predict the 2020 bear market, hereby referred to as BM(s), is the cause itself. Nobody actually knows how this global Covid-19 pandemic is going to play out so nobody truly knows the long term effects of the virus on our economy and markets. The spectrum of unknowns and possible tragic outcomes make it hard to plan and predict. Therefore, it is difficult to analyze historical BMs as a predictive comparison for the current market, because no other market has had to react to such variables. However, I (being the data analyst nerd I've become) could not help but to see what the numbers could tell us!
My research was based on two primary aspects - analytics and the eye test (the charts). The analytics focused on the relationship between time and value in regards to BMs. The eye test focused on identifying commonalities, or lack thereof, between our current chart and historical BM charts.
Key Takeaways:
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Average BM: S&P 500 value loss of 36.78% & length of 73 weeks (1.4 years)
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2020 BM has unprecedented analytics & chart comparisons
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2020 BM began with a 34.39% decline, retracing 168 weeks in only 4.5 weeks!
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2020 BM's chart closely resembles the BM of 1987's chart and does not resemble any of the other six BMs studied
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History points to recovery taking V shape, or U shape
The Analytics
Bear Markets, since 1950, by the numbers:
1. 2/13/61 - 6/26/62: S&P -22% in 28 weeks
2. 12/2/68 - 6/1/70: -29% in 78 weeks
3. 1/12/73 - 12/1/74: -43% in 98 weeks
4. 11/28/80 - 8/12/82: -27% in 89 weeks
5. 8/25/87 - 12/4/87: -30% in 14.5 weeks
6. 3/24/2000 - 10/9/02: -49% in 133 weeks
7. 10/9/07 - 3/9/09: -57% in 74 weeks
Value decline & Length
Per the graphs above, the average BM since 1950 resulted in a decline to the S&P by 36.78% and a duration of about 73 weeks. When you compare those numbers to the declines experienced this year, you see a BM noticeably different from those of the past 70 years.
The 2020 BM began on February 19 with a top value of 3,386 on the S&P. The current bottom was March 23 when the S&P dropped to 2,237. That is a 33.94% drop in the S&P in only about 4.5 weeks! A drop of that amount is right in line with the average BM but the comparison in duration is where the huge variance lies. The relative decline that the S&P experienced in only 4.5 weeks is comparable to, or more than, the relative declines of previous bear markets that lasted upwards of 100 weeks!
In simpler terms, the S&P has already fallen to similar levels of previous bear markets in a much, much shorter amount of time; those bear markets took on average 73 weeks to decline as much as the S&P has already dropped in only 4.5 weeks!
Outliers
There were two main outliers, the 2007-09 BM & the 1987 BM (to be revisited). The '07-09 BM was the biggest decline but not the longest and the 1987 BM was the shortest in length but not the lowest value decline.
Value decline outliers:
Upper (2007-09) = 54.37% higher than average
Lower (1961-62) = 40.70% below average
Length outliers:
Upper (2000-02) = 80.72% higher than average
Lower (1987) = 80.82% below average
Since the value decline outliers form a tighter range than the length outliers, the data tells me that the value decline is more predictable than length!
Retrace Length
The value loss covers the specific % decline in the S&P value and the retrace length refers to the time loss caused by a decline. As previously stated, the 2020 BM took 4.5 weeks to reach the current bottom value of 2,237. The last time the S&P was valued at 2,237 was 11/25/16, as shown in the chart below.
The red bar represents the amount of time it took to lose the same amount of value gained over the period represented by the green bar. It only took 4.5 weeks for the S&P to lose the same amount of value that it took 168.71 weeks to gain!
To turn that into, hopefully, useful information, I divided the retrace length by the length of the BM and called it the ‘Retrace : BM Duration Ratio.’ The 2020 BM's Retrace : Bear Market Duration Ratio (in weeks) is extremely high at 37.49. To clarify, this means that for every 1 week that passed during the dip, the S&P value retraced 37.49 weeks worth of trades/gains. That is a huge ratio! Especially when you compare it to the ratios of previous bear markets:
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The average Retrace : BM Duration ratio over the past 70 years is 3.62 (with a high at 7.82 and low at 0.41). Across the previous seven BMs, the S&P retraced an average length of 3.62 times the lengths of the BMs. In other words, for every one week that passed in the average bear market, the S&P retraced 3.62 week’s worth of value. The current ratio of 37.49 blows those figures out of the water!
All of these analytics prove one thing:
The violent sell-off to begin the 2020 BM acted like a fast-forward button that jam-packed the typical BM losses (in value & length) into a short 4.5 week time span. Most investors are hesitant to say "the bottom is in" because 4.5 weeks does not feel like a long enough time for the market to accurately discount itself. However, the value loss is more predictable than the length of the average BM. This means investors across different decades have "agreed" on a general value loss during a BM but not the time to reach that loss. I think in several months to a year, we will recognize the 2020 BM as the shortest one to date!
But what do the charts say? At this point, there are three directions the 2020 BM can take. We can continue the strong recovery and end in a V shape. Similarly, we could continue trending upward but on a slower, more gradual U shaped path. Lastly, the market could completely reverse and we could retest the 3/23 lows for a W shape.
After studying the charts, everything is pointing towards a V, or possible U, shaped recovery.
The Charts
The analytics prove that the 2020 BM is a unique one. The 4.5 week, 34% decline resulted in a S&P value loss worse than four of the previous seven BMs since 1950:
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1961-62: -28% in 28 weeks
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1968-70: -29% in 78 weeks
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1980-82: -27% in 89 weeks
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1987: -30% in 14.5 weeks
Think about that, in just 4.5 weeks, the stock market incurred a larger relative loss than four whole BMs that took an average 52 weeks to expire. One more nod to the uniqueness of the 2020 BM.
For the other three BMs with larger relative value losses, we will take a look at the charts for comparisons. We will start with the chart for the 2020 BM which shows the two years leading up to the top of the BM and the dramatic decline thereafter:
Next we will compare this chart to the other three BMs. For each instance, two charts are displayed; a chart showing the duration of the bear market plus two years before/after and a second chart magnified to show just the duration of the bear market. The blue marker indicates the S&P 4.5 weeks in the BM and the black marker indicates the the point at which the S&P experienced a 34% value loss. Three key things you will notice:
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Each of them have gradual declines over a long period of time (much different than 2020 BM's steep decline in 4.5 weeks)
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The 34% decline marker is at the end of each of them (much different than 2020's 34% loss in 4.5 weeks)
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None of them resemble the 2020 BM
BM of 1/12/73 - 12/1/74
BM of 3/24/2000 - 10/9/02
BM of 10/9/07 - 3/9/09
More proof that the 2020 BM was much different than other BMs of the past. All but one; the 1987 Bear Market.
Of all the charts studied, the 2020 BM most closely resembles the 1987 BM. The shortest one of them all at only four months, the ‘87 bear market ended with a 30% decline in the S&P in just 14.5 weeks.
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The harsh drop-off you see is a 28.57% decline in just one week, capped off by the infamous Black Monday of 10/19/87. As you can see for yourself, based on the extremely steep decline followed by a rapid recovery, the chart for the 1987 BM is the only BM since 1950 that mirrors the current market.
The 1987 BM ended in a V shaped recovery, meaning the market fell quickly then rebounded quickly. We are currently making a V shaped recovery; another similarity between the two. In fact, we are currently recovering about two times as fast as the 1987 BM recovery, but I don't think this huge momentum swiftly carries us all the way back to pre-BM levels. Nor do I think we will retest previous lows. Based on all of my detailed analytics and chart studying, combined with the uncertainty the virus may present, I am investing with the thesis of an extended V shape or shallow U shaped recovery.
Only time will tell the actual shape of the recovery and I will continue to monitor it as we progress through market and virus cycles. Be sure to join the mailing list to be in the know on future posts covering a vast array of financial topics!
Thank you for reading. Always remember: "More assets. Less debt. More Equity"