Finances,  Investing

The 2020 Bear Market – Coronavirus, Investor Fear, Losses and Recovery

The 2020 Bear Market – Coronavirus, Investor Fear, Losses and Recovery

Just a few days ago, I made a post about the 2020 stock market crash. Since then the stock market has had a volatile slide down officially starting the 2020 bear market.

On February 19th, 2020, the S&P 500 closed at an all-time high of $3,386.15. Immediately after, due to the specter of Covid-19, it became an intense slide. On March 12th, 2020, the market closed at $2,480.64. That’s a 26.8% slide in less than a month. Welcome to the 2020 bear market everyone!

The speed with which it happened has been impressive with two of the top 20 down days on a percentage basis happening in the last month. The volatility has been interesting as well with the market bouncing up and down multiple percent a day. Those new to investing have certainly been spooked.

After all, the quick movement has wiped out nearly all the gains since 2017. Many who started their investing career recently and have seen green for a while now find their portfolios entirely in the red. Certain industries and market caps have been even harder hit. A few companies in the cruise industry have lost 70-80% of their value in a single month. Even stalwarts like Boeing have fallen over 50%. An oil price war has added to the fire and caused oil companies to fall at a rapid clip.

All in all, it’s been a bad month to be an investor. Most graphs probably look like the one below which represents my 401k.

2020 bear market

Yikes, that’s not great. It’s not easy being an investor right now and seeing the sea of red and the uncertainty that surrounds it. I’ve seen many people already ask about whether or not it will continue and whether they should sell right now to stop from losing more. Here are some thoughts from a long term investor.

The 2020 Bear Market and What it Means

The answer to that question is never simple but it’s important to remember some things. First a bear market is simply a 20% reduction of prices from the peak. We’ve had a good run these recent years so may are still well in the green on investments made just a few years ago.

A bear market doesn’t automatically signify economic slowdown or a recession. However, it definitely signifies worries about one.

It can be a leading indicator of one as prices drop due to worry about economic growth(and earnings) ahead. A bear market and a recession do often, but not always, go hand in hand. We won’t know if we’re in a recession until we see two full months of negative GDP growth but I’d wager we’ll get there given all the recent turmoil.

Second and most importantly is that the economy works in cycles. These cycles are often driven by external factors that either spur or slow production. The most recent example is the 2008 banking crash which brought about a bear market and recession. Bear markets are not rare and there have been many like it in the past. On average happen every ~7 years which is relatively common.

In this case, that external factor is the coronavirus, and the demand and supply shock it has been causing. On top of that, you’ve got some oil issues and a real complex situation emerges.

The reality is that investors have been lucky. We’ve been running with the bull(up market) for 11 years now. Therefore, it’s not unexpected to see something like this emerge and push the market down. We were sort of due for one of these complicated economic issues.

As an investor, it’s very important to know the historical context when it comes to bear markets. Often, you’ll hear that this time it’s different but it very rarely is in the context of the economy and more importantly, it has always recovered.

The common thought process is that every bull market is the same but every bear market is different. Sure, it’s different in the sense of the economic circumstances that cause the fall but the historical reality has been that every bull market is the same and every bear market is the same.

Stocks go up, stocks go down then they go back up again. Historically, the long term trend has been up. The reality is that unless the world economy collapses completely and we have a lot of big problems on our hands, it will likely go back up again. If you’re in the complete collapse camp then you shouldn’t be reading this, you should be building a bunker and stocking it up!

There’s certainly timing differences. Sometimes the crash takes a while to happen while other times, it moves at a rapid pace. Right now, we’re moving at a rapid pace which makes things feel even worse. However, it’s still a similar reaction to what we’ve seen in the past when economic troubles arise.

It’s the cyclical nature of the economy that things ebb and flow and it has shown itself out in the history of the markets.

However, it’s also important to understand that bear markets can be painful and that the pain they cause can extend for a long period of time. There’s a reason the great depression is called what it is, because it sucked and things looked bleak for a long period of time.

The recent bull market has been a fun and easy ride and any losses showed a quick recovery. Just look at the drop in December 2018 as an example. The stock market lost nearly 20% of its value but was back in the green a few months later. When it comes to bear markets, that has not been the norm and it’s important to understand that when it comes to the 2020 bear market.

Stock prices are down and based on long term history, they will eventually recover but it may not be as easy a road as many would like.

The chart below illustrates that point well. These have been 8 bear markets in recent history where the market has dropped 20% from peak to bottom on a total return basis(including dividends). I’ve illustrated the drop, the time it took to hit bottom and the recovery, as well as the combined recovery to peak(including the downturn).

2020 Bear Market

The truth as shown above is that bear markets can be damn scary and living through them can be rough as an investor.

The most recent bear markets have seen drops of 45% and 51% respectively and on average, bear markets drop 40.6% from peak to bottom. Right now, we’re sitting at a drop of 26% so based on those numbers, we’re potentially only halfway done.

On top of that, often, a bear market can lost a long time.

On average, the time from peak to bottom is 16.2 months. That’s more than a year! The most recent bear markets have been in the 16-25 month range. That’s a long period of time to see red in your portfolio.

Right now, we’re only one month into the 2020 bear market. We may potentially have a long road ahead of us. However, on the opposite end some of the bear markets only took a few months to bottom out.

Beyond that, the pain can be felt in the long time it can take for your investments to recover. On average, recovery takes 41 months! The last two bear markets have been around there too. The longest bear market during the great depression took more than 12 years to get back to peak prices.

It’s quite possible that the stocks we bought at the high in February 19th 2020 don’t get back to those prices until almost 5 years from now. On average, that’s the reality of a bear market. The bear market lasts 16 months meaning it takes 16 months to hit bottom then it takes another 41 months to get back to the peak(inclusive of dividends) for a total of 57 months from peak to bottom back to peak again.

That’s a long time and likely includes a lot of crazy price movements like we’ve seen the past few weeks. On the other end of scale, some have recovered in just over a year and who knows if things will move faster this time. The recent price movements are hectic enough in both directions to make things unclear.

However, it’s also important to not look at those daily price movements too closely.

That can be hard to do with the various shock headlines on the various financial websites. S&P TANKS, S&P SOARS, S&P PLUMMETS.

The reality is that bear markets have a tendency to be volatile and go through periods of ups and downs.

Even gains can be misleading. Right now, as I write this, the market is up 5% after a day that was down just as much.

However, two of the biggest S&P 500 daily percentage gains(+11.58% and +10.79% respectively) happened right in the middle of the last bear market(October 2008). Those gains might have made investors feel great but the market went right back to falling after them hitting the bottom in February 2009. Today’s bump is nice but who knows if it’ll even end up given the recent market dynamics.

Those sort of movements can play a number on investors’ emotions. If the market is down, you want to sell for fear of losing more. Once it goes up again, you want to buy back in for fear of missing out. That’s totally happening right now. The market was up 1,000 points just a few days ago followed by a number of down days. The market may be up today but who knows what will happen in the next few days. That’s the reality of a bear market, the unknowns are scary and prices move erratically.

That makes for a hard investing environment.

Even those that understand this well and keep investing at lower prices can have other fears that may compound these issues. Right now, the Covid-19 scare is one that may impact the health of many of us. On top of that, falling stock prices and impacts to industries may lead to job loss and other economic issues that impact us in a big way.

Hell, I went to Trader Joe’s yesterday and found the shelves near empty despite only having a few confirmed cases in our state. The worry is definitely real and it’s hitting both our personal and investing lives.

So the big question on the investing side is, are we in a situation where the stock market will continue to drop for another 15 months and then take 4 years to recover?

I don’t know, that’s part of being an investor, the future is often murky. That’s also what makes active investing so difficult. You can open your eyes one day and be down 5% then be back up the next day.

Sure, there’s certainly a lot of ominous clouds on the horizon. Many things are shutting down for an extended period of time in an unprecedented fashion. All the major sports leagues are taking a break, travel is paralyzed and people are worried. The economy will surely be impacted, there’s no question about it.

On top of that, even with the recent drop, the Shiller PE is at 23.5 against a mean of 16.7. It’s not like things are looking mighty cheap either. For some context, this same metric hit 15 during the 2008 bear market. However, it bottomed out near 23 during the 2000 bear market.

If we’re headed to a 15 PE like we were during the financial crisis, then we potentially have another 35% drop on the way! However, if the 2000 bear market is an indicator then we’re close to the bottom now! Which is the right answer? I don’t know and neither does anyone else! Isn’t being an investor great?

That’s what can make a bear market scary to many and why it’s so hard to invest “correctly”. Today could be the bottom or it could be way down the road with the road to recovery paved with up and down days.

What’s an investor to do?

For me, none of this stuff matters much. I look at the market today and have the same fears as many of the people out there. I think there’s a lot of bad signs ahead and I’m certainly not happy with my current portfolio shedding 100k+ in gains in one month.

However, I know that reacting to this in anyway would do more harm than good. My faith in my ability to sell at the right time and buy at the right time is pretty much 0. After all, that’s one of the reasons why common investors do so much worse than a simple S&P 500 funds.

They’re terrible at making decisions. Even now, people are thinking of selling all their holdings after a near 30% drop. What will happen if the stock market goes up 10% in the next week, will they buy back in again?

Most market gains and losses happen in short periods of time and missing those periods of time can be disastrous to your results. An investor who invested $10,000 in 1980 would have had just shy of $700k by January 1, 2009. If they just missed just 10 of the best days in the market, that number would shrink by half. It’s quite likely that selling now would mean you’d probably miss some of the upside when the market does turn around. You simply just can’t time it right.

Sure if the market does keep falling, you’ll feel good about yourself. However, who’s to say you’ll buy back in at the right time. The market is up 5% today, pre-market, what if you sold yesterday and that was the bottom? It’s very hard to time things correctly and missing on just one or two days can be a huge sink to your returns.

The reality is that even people that bought in at the very peak of the 2008 crash did pretty well in the long run(less fantastic now but still pretty good).

On top of that, the alternative investments don’t present attractive opportunities. During the 2000 bear market, I could have gotten 5-6% yields in 10 year treasuries. It was an easy decision to move some money into bonds and sell stocks.

Now, that same treasury gives me less than 1%.

With the recent price drops, some high quality companies or etfs like VYM are offering 3-4% yields. From a long term return perspective, I like the latter over the former. Even my dividend aristocrats portfolio is getting close to 3%.

Sure, there’s some risk with dividend cuts if the economy is negatively impacted. I’m very aware of that. However, the risk/reward seems more favorable on the stock side when it comes to long term returns.

End of day, that’s what it comes down to right now. It’s all about long term return. The prices today or tomorrow or six months from now don’t matter. The 2020 bear market will suck but I’m confident than ten years from now, the prices we get today will be a pretty good deal. That’s even if those prices drop another 20 or 30% from today.

I’m not scared about buying today or about buying in three weeks because I’m buying with an eye on the future.

This isn’t the first bear market I’ve been in(2008 was the first) and it won’t be the last but there’s lessons to be taken from each one. The same panic felt today was felt then and the same panic selling that happens today happened then.

It’s more pressing now because it happens today. There’s never a road map you can look to for comfort when it comes to situations like that. Right now, the economy is shut down which is hard to fathom and will have unknown impact to the world at large in the future.

It is not easy to invest through this market but it’s likely prudent in the long run to stay the course.

The main lesson is that bear markets are scary and a real good test of your asset allocation and investment plan. The fact that I’m not stressing about this money tells me that I have the right asset allocation for my risk tolerance. If you’re losing sleep then maybe it’s time to revisit yours.

The next lesson comes from your ability to handle that risk and take advantage of opportunities. If you’re 65 and fully in stocks then you are probably in trouble. However, if you’re young, bear markets are often the best time to buy. Yes, things look bleak right now and they will look bleak for a while. I’m worried about my job, the economy and my health but I’m optimistic that long term, we’ll all be OK and I’ll keep investing through it all. Hopefully you can too.

It’ll certainly be an interesting time to be an investor. High frequency trading likely induces bigger market movements than we’ve seen in the past. However, as always, with these things, it’s impossible to tell what the future brings so I’ll just keep investing week after week. After all, the stock market remains the best way to build wealth long term and that will likely continue well into the future. As a first generation immigrant who wants to grow their wealth and don’t make a ton of money, I don’t have a lot of better options.

Will the 2020 bear market be short lived or a long term trudge through low returns and pessimistic outlooks. I don’t know but given that my time frame is more than ten years, I’m not too worried. Hopefully, it doesn’t turn into the great depression!

It might not be great for the next few months or even years but eventually it’ll tick up.

My main worry right now is keeping my job and staying healthy. However, I’ve got a well stocked emergency fund which I keep for occasions like this one. Hopefully, you’re on the same page and of the same mindset. Here’s to good health and a 2020 bear market that stays in 2020.

As always, talk with your qualified investment advisor before making any decisions around your portfolio. Stocks are volatile and you can lose a lot of money in a short period of time!

2 Comments

  • Steveark

    It’s just my opinion, but I don’t think empty store shelves signify panic. Greed maybe, but not panic. People are merely trying to avoid inconvenience, they aren’t worried about survival. It’s no fun to run out of toilet paper, but that’s not going to panic anyone. And a less than one percent kill rate doesn’t panic a nation of individuals conditioned to thinking this stuff always happens to the other guy. The things that indicate panic are riots, looting and violence. That’s not happening and won’t happen over this flu.

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