.
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.