By Robert S. Bacarella | March 12, 2020
The current market condition reminds me of Rocky Balboa’s face during his fight against Drago in Rocky IV…bloody, bruised and broken. The recent market beating is at the hands of the coronavirus and the chances don’t look good for avoiding a further beating and a final knockout punch.
But remember what Drago said about Rocky’s resiliency: “He is not human; he is a piece of iron.” We believe markets are just as resilient, given enough time.
Right now, the market’s round to round volatility reflects investors’ uncertainty as to how the virus will be contained, when it will peak and how quickly a vaccine can be developed.
Historically, these types of stock market pullbacks can be attractive buying opportunities; however, it is important to review past bear markets to provide a guide to what’s possible. Despite the unique causes of the current pullback, we may nonetheless see certain similarities to past events.
Bear market review
Since 1969, there have been five bear markets, all with different duration periods and price percentage declines. Using the S&P 500 Index, the duration of a market decline has ranged from three months to 2.1 years. Likewise, price declines ranged from -21.0% to -50.9%. Each market decline had its own unique characteristics that impacted both the duration and percent decline of each respective bear market.
The shortest bear market was the “V’ shaped 1987 crash, lasting about three months, declining 29.6%. The longest period of decline was the 2000 dotcom crash, lasting 2.1 years, and declining 44.7%.
The worst percent decline was during the 2008 financial crises propelling the market down 50.9% over 1.3 years.
Furthermore, regardless of the precise similarities and differences, reviewing past bear markets can help investors maintain their composure during difficult times and, especially for younger investors, to keep a long-term perspective.
The current crisis
The financial fallout from the coronavirus has been fast and furious. Investors are reacting to lower corporate earnings expectations due to frozen economic activity in parts of China and Italy and a general hunkering down of consumers as they avoid public places, travel less and curtail spending.
This is not a “financial” crisis but rather a short-term health issue that affects demand and supply. There are numerous government stimulus programs in the works that could ease the financial fallout, and once in place could accelerate economic growth over the longer-term once the virus is contained.
We believe all these factors point toward a short-term corporate earnings issue that suggests a “V” shape type of recovery, similar to the 1987 recovery period.
What to do now?
We don’t recommend trying to time the market or attempting to pick a bottom. However, we believe that “now” is the time to start dollar averaging into the market.
Just like Rocky’s comeback to win the fight, the market will come back from its beating, in our view. When things look as bruised and bloody as they do today, it’s helpful to return to past examples and emphasize a long-term perspective.