Where do we go from here?

RYAN   By Guest Blogger Ryan Lewenza

It’s official! The S&P 500 has now experienced a bear market decline of 20%, coming in relative quick succession to the 2020 pandemic-induced bear market.

With this week’s big mid-week decline the S&P 500 and TSX are down 19% and 5%, respectively, year-to-date (ytd). While we were calling for higher market volatility this year as a result of the Fed rate hikes, we definitely didn’t envision a 20% bear market unfolding.

We can thank, in part, Tsar Putin for this market decline as it’s my belief that the Ukraine war is having a material impact on the equity markets as a result of the hit to global GDP and how it’s exacerbating the high inflation problem. Essentially, this terrible war is amplifying the volatility and downside across the capital markets.

At its crux the equity markets are trying to determine whether the Fed rate hikes, the Ukraine war, and lockdowns in China will lead to a US/global recession. This is the million dollar question.

We did get some good news on the China front this week with the government starting to roll back some of the restrictions and with a projected full reopening date of June 1. I’m expecting a good bounce back in economic activity in the second half as the Chinese economy fully reopens, which could alleviate this concern. However, until we get clarity on the inflation/Fed rate hikes and Ukraine, the markets are likely to remain volatile in the short-term.

Today I’m going to review the data around past bear markets to see what insights we can glean on when this bear market may run its course. This post is pretty data heavy so my apologies in advance.

First, we’ve had it pretty good over the last three years in the markets and portfolios and nothing goes straight up. These selloffs, while hard and stressful, help to blow off the excess, get us back to long-term trend, and set us for a future recovery and ultimately new market highs. Equity markets always recover because of human progress and our collective ability to figure things out, generally speaking.

So, when markets are good for an extended period we forget that corrections occur and, in fact, are pretty normal occurrences. The chart below speaks to this. I provide the annual returns for the S&P 500 (green) along with the maximum decline or drawdown (blue) in each year. Since 1980, the S&P 500 has experienced an average decline of 14% in any given year. Some years it’s -5% like last year or -34% during 2020. But over the long-term the average intra-year drawdown is 14%, which is where we were to start this week.

The Average Drawdown for the S&P 500 is 14%

Source: Bloomberg, Turner Investments

No one likes these sell-offs and to see our net worth decline but it’s important to keep a few key things in mind – equity markets experience these sell-offs fairly regularly, and they always recover from bear market declines. Full stop!

So now that we’ve experienced a bear market decline of 20%, where do we go from here?
As I covered in a recent post I don’t believe it’s inevitable that the US economy is going to fall into recession. If we get the ‘soft landing’ that I’ve been calling for, then I believe we could be getting closer to the bottom given that the S&P 500 has experienced the typical or average drawdown in a year.

If in fact the US/global economy falls back into recession, then there likely could be more downside before this bear market fully runs its course. Below I include a table of every bear market since WW2. I further break up the bear markets into non-recession and recession bear markets. Recession bear markets are the worst with an average decline of 35% peak-to-trough.

Non-recession bear markets fall a gentler 24% on average. When looking at all bear markets the average decline is 30% so that would put us roughly at 2/3rds of the decline if there is a recession.

Historical Bear Market Declines for the S&P 500

Source: Bloomberg, Turner Investments

So that’s the bad news. Now fast forward and focus on what happens following bear markets. We’re so caught up in the present that we can’t see into the future and the inevitable recovery that will unfold.

In the table below I continue with the data dump and analyzed how long it took to get back to even and stock market returns following bear markets. Looking at the last 12 bear markets it took on average three years to get back to even following bear markets. Markets always recover. It’s just a matter of time.

More importantly, the returns following bear market lows are phenomenal and why investors need to remain invested to take advantage of the future recovery. On average the S&P 500 is up 42% and 59%, one and three years later, respectively. And note how the S&P 500 was positive every single time one and three years after the bear market low. So based on this extensive data set, 100% of the time the S&P 500 is up following bear market lows and is up big.

Historical Recoveries from Bear Markets for the S&P 500

Source: Bloomberg, Turner Investments

So there you have it.

It’s been a tough go in the markets this year and in fact is the worst start for the S&P 500 since 1939. It’s our contention that the unjust and unprovoked invasion of Ukraine, along with the lockdowns in China, have greatly contributed to the current market volatility and declines this year.

We’ll find out in the coming months whether these factors will lead to a global/US recession. But today’s post is to provide readers a potential roadmap of what may unfold in the coming months and most importantly to emphasize that: 1) bear markets end; and 2) recoveries from bear markets always occur so stay invested, turn off the TV, avoid looking at your account balance and enjoy the summer days. And maybe a few more ‘pops’ or whiskeys to get you through this challenging period wouldn’t hurt.

The sun will rise again and so will the markets and your portfolio.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.


Now & next

The theme this week, of course, has been consequences. Next week we’ll prattle on about opportunities.

There are consequences to buying the biggest asset in your life on emotion. FOMO is a disease. So is familial pressure. The only cure is a bad outcome.

There are consequences to recency bias. That’s believing asset prices can never go down (because they just went up) or that interest rates can never rise (because they recently fell).

There are consequences to thinking you don’t have to go to work anymore, but will still always be paid and valued. WFH is doomed.

There are consequences in moving to a distant place you know nothing about just because properties are cheaper there. Life is not about a house. The intangibles you give up are… consequential. Like culture and a career. And now, equity.

There are consequences to debt. Society is pickled in it. Worse, all this debt is variable-rate, floating debt or at rates which are routinely reset.

We’re entering a storm. Not quite there yet. Just wind and rain. The hail, gale and locusts come later. But we can clearly see where this system is heading. The cost of money takes a big jump in 12 days, then again in a month, then again eight weeks later. Veteran realtor Carly texted me on Friday about a listing (over $2 million) in Bunnypatch north of T.O on three acres. “Got a full priced offer the day after and tons of showings,” she said. “There is panic buying happening before the rates go up.”

(Of course, she and I both know it’s better to wait for lower prices, then buy with a smaller mortgage at a higher interest rate. Affordability remains the same. Debt tumbles. But her job is to reward the seller, not advise the buyer.)

Down the death highway in Kitchener-Waterloo, where prices romped higher 45% in 2021, comes word April sales dropped 25% and listings have increased 48%. The average house price fell $50,000 last month, a 5.2% decline – more than 1% a week.

Michael is a local lawyer. He sends this report:

Sales dropping, dropping, dropping. People can’t afford the gas to go to all the sudden open houses!!!!. A few of my fellow Lawyers in the big smoke tell me their Real Estate Litigation Departments are getting very busy on Agreement of Purchase and Sale/failure to close breach items (with all kinds of creative/stupid answers: ‘The Agent and Lawyer never told me I could not get my deposit back.’ ‘I don’t speak English and it was not explained to me’ (this from a U of T Engineering Graduate who had a Chinese/English-speaking Agent) ‘I overpaid and it’s not fair, my bank never told me my mortgage commitment was not actually firm (good luck when your condo finally gets registered in two years and you qualified on a today interest rate- yikes in two years).

Well, you get what’s happening. Lots of deals inked in March and scheduled for June conclusion will not close. Condo assignment sales are blowing up. Bank appraisals are coming in under sale prices, causing a panic attack for buyers without an extra boatload of cash. And as the stats published here yesterday clearly show, average prices everywhere are heading down – despite some panic buying ahead of the next 50-point CB bomb on June 1st.

Consequences. For sellers who waited too long to hit MLS, they include leaving money on the table. Hundreds of thousands. For buyers brave enough to wade in, here are some guidelines.

First, do not buy before you sell. That was a winning, no-risk strategy six months ago. Today you stand an elevated chance of ending up with two properties, no money, extreme debt and endless marital stress.

So, if you really need to move and find a perfect place to buy, make the offer conditional upon the sale of your existing home. It’s simple. Commit to buying the new property if yours sells within a certain period of time (30 or 60 days). If the seller receives an offer you have 48 hours to firm up, or lose the deal. But the odds of that are low since properties with a conditional offer on them attract less buyer interest. Anyway, your risk is eliminated.

In fact, feel free to make an offer these days on any property with the two key conditions: (a) a satisfactory home inspection and (b) financing. It’s no longer a seller’s market so if the vendor doesn’t like conditions, tough. You da boss.

Regarding financing, get pre-approved. Don’t go VRM but instead lock into a fiver. They’ve swelled in cost but compared to what happens later this year they’re still bargain-priced. And be aware that bank appraisals are dropping faster than Jason Kenney. Lots of buyers are coming up to closing day and learning lenders will be handing over far less than they anticipated.

Rates are not rising briefly, by the way. 2% mortgages are so 2021. We’re heading back to a normalization where loans at 5%, 6% and 7% are common and may be with us for years. So do the math. Can you afford your mortgage if payments soar upon renewal in 60 months?

Finally, always buy what you can sell later. There is no such thing as a Forever Home, like your spouse believes. Understand that once you firm up an offer to buy there’s no backing out. You cannot walk free. At a minimum you’ll lose the deposit, face litigation costs and could suffer a court judgment forcing you to pay the seller that difference between what you offered and the actual discounted sale price when the property moves.


You’ll like next week a lot more. Trust me.

About the picture: “Thank you for all that you do with this informational site,” writes Rob. “My wife showed me your blog a few years ago, and it’s been a part of my daily lunch-time read ever since. The attached photo is Pylot. He’s a Border Collie / Lab X that was in our lives for 15 years. He was smarter than the average grad student, but could still chill out, especially on a beach. He was a rescue from Border Collie Friends Rescue in BC. I will always maintain that I may have rescued him, but he saved me.”