Market and Economic

Fear the Bear?

With the sharp downward price action on the S&P 500 on March 9, we are now very close to a bear market, 11 years to the day of the Financial Crisis low.
March 2020

You make most of your money in a bear market, you just don’t realize it at the time.

- Shelby Cullom Davis

The coronavirus-driven equity market selloff since February 19 has been swift and severe. With the sharp downward price action on the S&P 500 on March 9 (driven by virus fears in addition to an oil price crash after Saudi Arabia started a price war), we are now very close to a bear market, 11 years to the day of the Financial Crisis low. A bear market is defined as a 20% decline in securities prices from a recent high. Though painful, equity selloffs of 20+% are relatively common. Since 1928, a bear market has occurred every 3.6 years on average. The last bear market occurred in early 2009, though we came extremely close to a bear market in the fourth quarter of 2018 as recession fears spread. 

S&P 500 Bear Markets

*Bear market defined as 20% or more decline

Peak Date Trough Date % Loss Number of Days**

9/7/1929

11/13/1929

-44.7%

67

4/10/1930

6/1/1932

-83.0%

783

9/7/1932

2/27/1933

-40.6%

173

7/18/1933

10/21/1933

-29.8%

95

2/6/1934

3/14/1935

-31.8%

401

3/6/1937

3/31/1938

-54.5%

390

11/9/1938

4/8/1939

-26.2%

150

10/25/1939

6/10/1940

-31.9%

229

11/9/1940

4/28/1942

-34.5%

535

5/29/1946

10/9/1946

-26.6%

133

6/15/1948

6/13/1949

-20.6%

363

7/15/1957

10/22/1957

-20.7%

99

12/12/1961

6/26/1962

-28.0%

196

2/9/1966

10/7/1966

-22.2%

240

11/29/1968

5/26/1970

-36.1%

543

1/11/1973

10/3/1974

-48.2%

630

11/28/1980

8/12/1982

-27.1%

622

8/25/1987

12/4/1987

-33.5%

101

3/24/2000

10/9/2002

-49.1%

929

10/9/2007

3/9/2009

-56.8%

517

**Number of days includes weekends and holidays. Source: Yardeni Research.

Importantly, a bear market does not always indicate an economic recession. Indeed, there have been 25 bear markets since 1929, but only 14 recessions during that time (source:  NBER). Prediction markets are currently pricing in above a 60% probability of recession this year (source: PredictIt). Though the path of the virus outbreak is highly uncertain, the U.S. economy is approaching the situation from a relatively strong backdrop with the U.S. labor market remaining strong (at least for the time being) and with housing activity picking up. However, the market itself is a leading indicator, so we must pay proper respect to what it is telling us. We feel the equity market is currently pricing in a mild recession. If a recession were to be avoided, we see scope for equity markets to bounce as concerns begin to subside.

We have had many discussions around what potential catalysts could set a floor for equity markets.  From a policy perspective, these factors include more central bank easing and more fiscal stimulus (potentially coordinated between governments).  From a health standpoint, these factors include a slowing of new cases of Covid-19 (likely at least a few weeks away).  We will be closely monitoring these and other factors in the coming weeks as we continuously re-assess our portfolio positioning.

Disclosures

Views and opinions have been arrived at by BMO Global Asset Management. The information, estimates or forecasts provided were obtained from sources reasonably deemed to be reliable but are subject to change at any time.

The S&P 500® Index is an unmanaged index of large-cap common stocks.

Investments cannot be made in an index.

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