Transcript
[THEME MUSIC]
Welcome to Market Perspectives, a Mercer Advisors podcast. Today’s episode is titled “A Brief History of Bear Markets.” I’m Josh Zumbrun. I’m the director of External Communications here at Mercer Advisors, and I’m joined today by David Krakauer, our Vice President of Portfolio Management. David, thanks so much for joining us today.
Thanks for having me, Josh.
So we’re here thinking about bear markets because we’re maybe in one right now. On April 7, right after the big tariff announcement earlier this month, the S&P 500 briefly slipped into bear market territory. It was down 20% from the peak it had reached in February.
Now it didn’t actually close the day down 20% so it’s not totally clear whether or not we’ll look back and say, this definitely was a bear market, but we’ve hit that key threshold. So before we dive in here, David, let’s define what we’re talking about here when we talk about corrections, bear markets, how do people look at those and define those terms?
It’s really important to make sure we’ve got the terminology correct. So I’ll add another term in there, which is recession. And I’ll give a definition for everyone just to make sure we’re all on the same page.
So when a market the S&P 500 or the Dow, or any of the larger global stock indices, when they pull back and drop 10% or more from their recent high, that’s called a correction. So 10% is the magic number for a index to fall for it to be in correction territory. If the index price keeps falling, then if it breaks through that 20% threshold, that is considered a bear market.
Corrections and bear markets have to do with the value of a stock index and the stock market.
The term recession has to do with the economy, and there are many ways to define what a recession is, but one of the most popular definitions is two consecutive quarters of negative GDP growth.
So not always do corrections and bear markets coincide with an economic recession, but sometimes they do. And it’s worth just making sure we have those three terms defined well.
So since we’re maybe in bear market territory. And again, we say maybe because it depends on if you’re looking at closing price versus intraday price, it depends what index you’re looking at. You can have a bear market in the S&P 500 not the Dow Jones. So right now we’re saying maybe we’re in bear market territory. Maybe when we look back, we’ll say we were in bear market territory. Put in context how common bear markets are and how we should think about maybe being in one right now.
Well, if we look back about 100 years, since 1929, the Great Depression, we’ve had 56 instances of a correction in the S&P 500, which again means a pullback of at least 10% from the recent high. So 56 times that’s happened in the past roughly 100 years for the S&P 500.
So that’s every other year on average. It’s pretty common.
Very common. And 22 of those 56 times almost half have turned into bear markets where they have fallen — the S&P 500 has fallen past 10% and actually hit 20% or greater of a threshold in a pullback from its recent high.
And out of that same period, there have been 15 economic recessions in the past 100 years as well. And so give or take a recession once every three to five years. And a bear market once almost four years on average.
It’s interesting. You look at the history, and we’ve lived through an unusual period where we had the ’90s and we had the 2010s where you had very long bull market and a very long economic growth period, but when you look at it historically, it tended to come a little more frequently than that. Recessions had been a little closer together than that, and bear markets had occurred more frequently.
The 10 years before COVID, the 10 years of the 1990s were unusually calm periods. And when we look back historically, we see a little bit more of that context that this is actually fairly common.
What we found when we look back at the past 100 years is that when a bear market occurs, when the S&P 500, for example, falls at least 20% from its recent high, they actually occur pretty quickly.
And on average, bear markets have lasted less than 10 months. That’s the period from peak to then the bottom of the market less than 10 months on average. Whereas bull markets then, as you just pointed out, especially in more recent history, have tended to last much longer.
So when the bear markets occur, when the corrections occur on average, they tend to happen pretty quickly. And then there is usually a longer period of a bull market where then the market then rises from the bottom level to hit a new high.
So what’s been the common bond, or is there a common bond that’s driven these different episodes of market downturn?
Really the common bond is that whenever there is a correction or really a bear market, it always feels different. And I think the one thing that I constantly try to remind people that watch the markets is that it is normal in periods of a large pullback or a drop in the stock market, it’s normal for it to make you feel nervous because there tends to always be a different reason, every time that causes the market to sell off.
And so every time, whether we look back at COVID, whether we look back at some of the past big market pullbacks, they always feel different. And so it’s important to expect to feel that discomfort or nervousness and not take an emotional approach to it and think about it in context of all of the past times we have seen bear markets and how we almost expect it to be caused by a different reason each time.
So it’s not a formula. It always feels like, wow, the world is really changing here. I don’t know what I should do, that is a common feeling. A lot of people look at a moment like right now and they think, oh, gosh, everything’s really different. We’ve never experienced this before. But I guess what you’re saying is it’s always the case that we’ve never experienced it before. That’s the nature of living through history and living through change.
So let’s dig in a little bit to some specific bear markets to give some examples of how they’ve unfolded. So the first one you mentioned there, the most recent big one is what happened during the early days of the pandemic. So walk us through that bear market and remind us of what that period was like in financial markets.
The global pandemic, COVID-19, it happened very quickly. And if we look back at the S&P 500, the S&P 500 peaked on February 19, 2020 and then dropped 34% in a matter of weeks. The bottom of the market when the S&P 500 sold off 34%, was March 24. So really a matter of about four weeks from peak to bottom. And then after March 23, then the market began to rise again and it rose and reached a new high, beating the February 19 high in August of 2020.
Just six months to a new high.
Just six months to a new high. And so it happened very quick. Obviously, when we all think back to COVID-19 and a global pandemic, that was something that was very different, very new than anything we’ve ever seen before.
The whole world, and especially the US, the whole economy really shut down and everyone was really trying to assess their own personal safety in a lot of ways. So that is another perfect example of a time where it felt very different, and there was a lot of fear and reasons to be nervous about the market declining 34%.
It’s also an example of how dangerous it is to try to time the bottom of these things. Think back to — the bottom was March 23, March 24. Think back to how early in the pandemic that was. Most places were still in complete and total lockdown.
In some places, the places, the lockdowns are still getting more intense at that phase. The course of the virus was totally unclear. Whether or not there would ever be vaccines was pretty much completely unclear how the economy would fare. Like nobody knew. We hadn’t even seen the first jobs report about the damage that was being done to the economy, and yet the bottom was already in. It’s amazing to me that the bottom was in that quickly.
If you were trying to time that, I don’t think anybody would have looked at March 23 of 2020, two weeks into the work from home era and said, this is the bottom. It’s going to get better from here. It was really early.
There are a couple things that I think are really important to take away, especially from COVID-19 because of how quick everything happened. One is, when it comes to timing the market, it’s not about just being right once and trying to find the bottom, it’s about being right twice.
You need to figure out when would I ever think about pulling money out of the market? That’s one decision. And then when should I put money back into the market? And to make those decisions and be right twice, is virtually impossible.
And even if we think back to just what’s been going on in the S&P 500 recently, we had several large days of the market pulling back 4%, or 5%. And then there was an announcement the next day and the market was up 9%.
And what’s important to remember, is that if we look at specific days and performance on specific days for the S&P 500, the largest down days and the largest up days tend to be right next to each other. And to miss out on those large up days can be very detrimental to someone’s long-term performance.
For the COVID-19, we just looked this up. The day after the trough, the day after the bottom, the market was up 9% that one day. So if you had missed just that one day you missed out on 9% of the possible returns in that recovery. It’s a huge miss from timing it wrong by just one day. It’s a really fascinating example of it.
Now, let’s step back. Let’s do another one. Let’s talk about the bear market in the global financial crisis, the 2007 to 2009 period, the Great Recession, all the banks failing. For most of us, if we have listeners who are 100 years old, they might remember one that was worse than this. But for most of us, this is the worst bear market that we’ve ever lived through. Take us back to what happened during that period.
Yes so really started in October of 2007. That’s when we first started to see some of the biggest banks fail and have some stress. And the market peaked on October 9 and then started to fall. And it kept falling all the way through from October 9, 2007 to March 9, 2009. So 17 months from the peak to the bottom of the market, the S&P 500 declined 56%. So 17 months.
And that’s really, I think, a testament to how long it took for everyone to figure out how entrenched some of these financial products were at the time when it came to the housing market, and how that trickled throughout so many areas of our financial institutions and global institutions. 17 months was a much longer period for the market to go into a bear market cycle.
It was also the longest recession since the Great Depression itself, in terms of how long that recession lasted. And you think back to it, it was like the summer of 2007 we were hearing about some problems with hedge funds, but it didn’t seem like it was a general economic problem.
Then you had Bear Stearns collapse, and that still didn’t maybe feel like it was a general economic problem. And then September of 2008, you had everything start to collapse. That was when Lehman Brothers went bankrupt, that was when AIG needed to be rescued, that was when Merrill Lynch got absorbed by Bank of America. That was when things started to go crazy. That was already almost a year into it, which just shows how long these dominoes can take to fall once it gets started rolling.
After March 9, where we hit the bottom of the market, then it took about four years for the market to climb back in the S&P 500 to reach a new high. So March of 2013 is when that new peak was finally reached. So it was also a longer recovery period not just a long recession and long bear market.
Well, and I think back on that and I think about if anything, that period 2009 to 2013 is when you wish in hindsight, that you’d been adding more to your investments. We might never again, be able to buy stocks at price we saw during that period. Living through it, it’s a terrifying period because the market’s down so much, and then you look at it later on and you think, man, that was a great time to be doing some investing.
And the big thing that we talk about obviously when these stressful periods occur, is first and foremost sitting with your advisor, revisiting your financial plan, making sure you’re aligned with the right risk targets for your investments.
But assuming you are, then it’s really important to think about this from the longer term perspective, you’re mentioning and thinking about if you have excess cash to put to work, when was the last time you rebalanced? For example, if you have stable assets that have actually gone up in value during this period and you’re out of your asset allocation targets, should we then move and shift some money back into stocks? And so there are opportunities that arise for long-term investors when valuations get reset at a lower level.
So these are two really interesting bear markets. The two recent big ones, very different. Everything about them is different. The causes are different, the duration is different, the amplitude is different, the recovery time. There’s not one template here that is followed.
And you look back even further and you see bear markets that are completely different in nature. The.com bubble was a big one. You had them during the oil embargo period in the ’70s. You had one in the 1980s when interest rates were pushed up to 20% by the Federal Reserve. Everyone is totally different. And so what of lessons can you take away as an investor from these periods when they are so unique each one?
When we think about all of these situations, like you said .com bubble, oil embargo and everything that happened in the mid ’70s, the main lesson to take away is to expect the unexpected. Expect it to feel different. When the market sells off, it’s always going to be for a new reason, and that’s just a part of history.
And the biggest thing that we always want clients investors to remember is to first and foremost revisit your financial plan, make sure that the risk you’re taking is aligned with your long-term goals, but stay invested, stay in your seat. When we think about portfolios here at Mercer Advisors, we spend a lot of time making sure our portfolios are properly be diversified to try to hedge out any of unnecessary, unsystematic risks.
But there’s always going to be large macro risks of markets pulling back. There’s always going to be situations like this. We expect it, and we expect it to feel different each time. We expect a different reason, whether it’s tariffs, whether it is a global pandemic, whether it’s a global financial crisis, we always expect something to come up and it’s important to stay invested, stay diversified.
Remember that when it comes to the largest up days, the market’s largest up days are usually right after the largest down days. And so the things that we can do to control the experience and try to take advantage of the bear markets we experience, have to do with systematic rebalancing of your portfolios, which again, we do here at Mercer Advisors.
You can also look at tax loss harvesting. So if you have taxable accounts where you’re investing in the stock market and the stock market has gone through a large pullback, there may be ways for you to harvest losses and get a tax deduction by doing so while still remaining invested. So we can harvest losses and put that money to work right away into other very similar investments. So make sure you’re not leaving the market, but you’re able to take advantage of some of the tax opportunities.
And then lastly, again, if you do talk with your financial advisor and you know you are aligned with the risk you’re taking, if you have excess cash on the sidelines that you feel like you do not need in the short term, they can be a great opportunity for long-term investors to put that excess cash to work when the markets have pulled back and when stocks are at much lower long-term valuations.
I guess the takeaway is, we didn’t know this was going to happen. Nobody knew this was going to happen, but we knew something was going to happen. We built portfolios in the first place as investors knowing that these kinds of things always happen. You don’t know exactly what, or exactly when, or exactly how big, but you know something’s going to happen and plan accordingly and stick to the plan. David, thank you so much for joining us today to talk about this.
Pleasure being here, Josh. Thank you.
If you’re already a Mercer Advisor’s client, don’t hesitate to reach out to your financial advisor to talk about your financial plan. And if you’re not Mercer Advisor’s client, but you’re interested in more information, go to our website merceradvisor.com, set up a phone call.
Thank you for being here with us today. This has been Market Perspectives.
[AUDIO LOGO]
LOGO]
