Barely A Bear
Is this officially a bear market? According to the market’s arbitrary definition of a 20% decline in the S&P 500 it is, but only using intraday data with the high price on January 4 and the low price on May 22. Using closing prices, we are down 18%, barely a bear but painful, nonetheless. But why quibble over a couple of percent. I think that the bear has emerged from hibernation. This view is consistent with the methodology I used for bear markets in History Is No Mystery: Part I, the first blog I published two years ago. I have updated a chart from that blog as well as one from my blog on bull markets History Is No Mystery: Part II to see what they tell us about what may lie ahead.
Bull Markets: 2020 Short But Sweet
In Chart 1 below the bars on the left side show the duration, in years, of each bull market in the S&P 500 since 1933. The bars on the right side show the percentage increase in the price of the S&P 500.
Chart 1
The median bull market lasted about 5 years and prices increased by 180%. The 2020 bull market lasted just under 2 years, the shortest ever. Prices rose 120%, a sweet increase but lower than the median.
Bear Markets: 2022 So Far…
The bars on the left in Chart 2 below show the duration of the bear markets in months, as bears are typically (and thankfully) shorter than bulls. The bars on the right show the percentage decline in the price of the S&P 500.
Chart 2
You can see that the median bear market lasted 17 months with a decline of 37%. The 2020 bear market was extremely short, with a decline from the peak to the bottom of only 1 month. On the other hand, the percentage decline was close to the median. How does the 2022 bear stack up so far? If the market bottomed with the low price for the S&P 500 on May 22, then it lasted 4 months, and the decline of 21% would be the second smallest. The shortest bear market occurred in 1990 with a length of 4 months and the smallest decline of just over 20%.
What’s Next?
While this is barely a bear market, our updated “History Is No Mystery” charts give us some historical guidance on where the S&P 500 may be going. So far, the bear market is shorter than the median and the decline is less than the median. Based on the data alone, there is a meaningful risk of a further decline over the next few months.
At this time, an extension of the current bear market, aside from any interim rallies, is supported by the fundamental situation as well. Bull markets are fueled by declining interest rates and large increases in government spending. With inflation still running too high central banks plan to raise rates further, not lower them. The huge increase in government spending that occurred during the last two years is declining as the risk from Covid has gone down (assuming we remain vigilant to prevent its spread).
Portfolio Implications
I am saying the bear market may have further to go over the next few months to prepare you for what could happen. What I am not saying is that you should try to time the market by reducing your holdings of stocks now that the market is down significantly. It is difficult to say when the bottom will be in, or if it is in already. As the old market adage goes, they don’t ring a bell at the bottom. If you sell now there is a chance that the bear market is already, or is close to being, over. Even if it is not over, it is hard to re-invest into stocks later as you will worry that there may still be some risk of the market falling more, or that the rally from the bottom is not a sustainable one.
From a portfolio perspective you should use a time horizon of 10 years to determine your asset allocation between risky assets (stocks) and less risky assets (bonds). You also need to factor in that over the long run stocks have increased in value (assuming diversified holdings) to provide an appropriate return for their risk. Given a 10-year horizon and the expected returns for stocks, maintaining your asset allocation’s weight in stocks, and investing any excess cash into stocks over the next few months, makes sense given how much cheaper stocks are than in January.
Invest wisely,
Dave Schaffner, CFA
Principal, Wayfairer Capital Management Ltd.