Bear market of 2022
A brief overview by David Thiele
June 27, 2022
This is simply a brief update regarding my overall views on the market and economy, where we are, where we are heading, and the impact this will have for investments.
Thus far this year, we have experienced the worst 4-month start to the market since 1939, the worst first half of the year since 1970, and according to “factset data”, the worst stretch in the Dow Jones since 1923, the worst inflation in 40 years, and finally, saving perhaps the worst for last, the worst bond market since 1842 according to a recent report in the Wall Street Journal. It’s no wonder we are officially in a bear market.
As a starting point, a bear market is typically defined as falling 20% or more from the high. However, as simplistic as that might sound, it’s simply not so straightforward. For starters, the market does not all correct in the same way at the same time, nor does everything necessarily correct as deeply. We’ve been in a rolling bear market for quite some time now, but, sort-of like different trains, from different locations, at varying speeds, but heading to the same destination, they won’t get there at the same time, but they will eventually arrive at the same bear market station. I believe we have been in a bear market for longer than what the indices reflect, essentially a “rolling bear market “, meaning certain sectors and areas had already entered into a severe downtrend and bear market territory long in advance of the greater indices. Things such as peloton, Netflix, and other such “stay at home “stocks have lost 70, 80, & even over 90% over the past 18 months, and this weakness is now reflective in the rest of the market. The point being a bear market is typically far more complicated than just defining it as 20% down from the high, and almost always has far greater implications. What really remains the most important, is how to best reduce the severe potential downside, yet remaining invested in such a way to still take advantage of the long-term upside.
This starts to become even more complicated as one tries to determine the severity of the bear market in terms of depth and length, which, of course, is nearly impossible to predict. The shortest bear market was in March 2020, and although it may feel as though the pandemic went on for decades, the beer market itself lasted for less than two months. By contrast, the 2007–2009 bear market lasted approximately 17 months, which also felt like an eternity. The average bear market lasts for roughly 389 days, and, according to Reuters, the average S&P 500 bear market decline since 1946 has been 32.7%. For comparison, the March 2020 bear market went down 33.92%, and the 2007–2009 bear market went down 55.6%. On average, according to Kiplinger, we have a Bear Market just under every 5 years, (56 months). While as the 2020 Bear Market had the potential to accommodate that average, it's quite likely the stimulus injected into the economy pushed back what probably should have been a deeper and longer bear market. Regardless, the Bull Run from 2009 to the pandemic Bear Market lasted 11 years, and in navigating this particular Bear Market, it’s important to note it’s normal, it’s part of the economic cycle, and, it will pass.
So then, flee to safety by way of bonds? Aren’t they, after-all, supposed to go up when the market goes down? Typically, but that is what has made this market extraordinarily difficult. In fact, it probably one of the most frustrating things about this 2022 Bear Market. The conservative “safe” hiding places one would usually run to have been anything but hiding places, and certainly not safe. In fact, in many ways, the “conservative” investments have been anything but conservative. Usually, there’s a comfortable balance of reducing the downside in the market by being in bonds, giving some measure of reduced volatility. Not, however, this year. According to Bloomberg’s Lu Wang and Isabelle Lee, the iShares 20+ Year Treasury Bond ETF, (ticker TLT) has moved in complete opposite direction of what was once the safe haven in former bear markets. In 2008-2009, during the Great Recession, the TLT was UP 18%, and in 2020 it was up 14%. This year, it’s not up, but rather, DOWN 24%. There are many other such examples, but without delving too far into the weeds, I can simply say they are reflective of why this particular Bear Market has already impacted investments far differently than the traditional Bear Market.
However, before we spiral too far into the doom and gloom, let’s keep in mind it is only important to understand the negative side so it becomes somewhat easier to navigate through the turmoil and noise. After-all, the good news is these types of Bear markets have happened in the past, and certainly they will happen again. Therefore, thanks to history, we have some idea on how to navigate forward.
For starters, we have had 28 bear market since 1928, and on average it takes roughly 27 months to get back to breakeven. Please keep in mind, however, this is only if people take the approach of “set-it and forget-it“, meaning, to simply buy and hold forever, as such, it would take 27 months to break even on average if one were to just hold all throughout the volatility. There are some rare exceptions, but typically, I am absolutely not a fan of just “set-it and forget-it “. For example, it took 15 long years for the NASDAQ to get back to break even from its peak in 2000. The S&P 500 drain that same timeline created the same give and take roller coaster from 2000 through roughly 2013. There are many more examples, but these all point to the same overall theme, simply allowing an investment to run without maintenance can easily backfire, and I believe it is highly critical to adjust and tweak investments along the way.
The opposite pathway can also be detrimental. For those investors thinking they can perfectly time to market and simply avoid catastrophe, fear it’s off usually keeping those people from re-entering the market, and missing the recovery. Again, to reiterate, it takes approximately 27 months to recover from a bear market, not 27 years, 27 months.
In fact, even more specifically, the market has rarely gone down two years in a row, and has only done so eight times since 1928. To elaborate a bit more, according to “the wealth of common sense “by Ben Carlson, the average forward one year return from a bear market is 6.4%, The three-year average forward return is 35% and five years, 80%. The moral of the story is to stay the course, remain invested, and trust in the process. A bear market, more or less, should not scare people out of the market. One should also not approach it with a “set-it and forget-it” attitude. I believe it is important to remain rational, objective, raise enough cash to have dry powder for opportunities, yet remain invested with a core portion in order to benefit on the other side. These things in combination will likely achieve an incredibly positive outcome once arriving on the other side of the bear market.
Putnam has an example I included which shows how important it is to stay the course. In their example, if one had invested $10,000 on December 31st, 2006, prior to the great recession of 2007–2009, and simply remained invested through December 31 of 2021, that $10,000 would currently be worth $45,682.
If, however, one was to miss the 10 best days of the market during those 15 years, it would only be worth $20,929. If one missed the 20 best days it would only be worth $12,671. If one missed the 30 best days, $8,365, and if one missed the 40 best days, it would only be worth $5,786. Clearly, per this example, one of the worst mistakes one can do is allow fear to drive the bus, and I do agree, for the most part. There is, however, a flip side.
Doing this similar example in reverse, J.P. Morgan did an analysis with Bloomberg data showing $10,000 invested in the S&P 500 on January 3, 2000, running through December 31, 2019, but missing the worst days as opposed to missing the best days. Without going through each specific timeline, I will simply point out two of their timelines. If one were to miss the 10 worst days, the returns would be $68,112, and, believe it or not, if one missed the 40 worst days, the return would be $256,291.
Clearly, if one could magically time the market “just right”, and miss the so-called worst days of the market, and of course participate in all of the best days, the returns would be amazing. However, the odds of doing so are slim, especially considering the “best” days of the market are usually close behind the worst days, creating a situation of “chance” as opposed to sound investment philosophy. However, there is absolutely every ability to apply a disciplined process and investment strategy which takes into account both the “best” days, as well as the “worst” days, and it’s as simple as being disciplined in the process of remaining invested for the long-term, but not randomly at all times without applying some balance. Rather, staying true to the process of averaging, or “breathing”, in and out of the market, and most importantly, remaining disciplined to do so when it feels as though the market is “broken”. It’s absolutely not broken, and as mentioned, Bear Markets are normal. Painful? Yes, but normal.
The average Bull Market lasts roughly 3 times as long as the average Bear Market, meaning one should be optimistic vs. pessimistic at a ratio of roughly 3 to 1. However, that doesn’t mean sticking our heads in the sand and just being optimistic because history tells us it will eventually be “okay”. It’s about averaging out due to varying sell signals, varying “canaries in the coal mine”, which allows for the ability to reduce exposure to the “worst” days in the market, maybe not all of them, but at least to some degree. Missing just a handful of those days and time periods with even just a portion can, and does, make a phenomenal difference. It’s a fine balance. No one can predict the market, the news, or exactly when things will turn, and usually it’s something quite “insignificant” that we would never guess to have a huge positive impact that can turn the market on a dime. That being said, one can certainly reduce exposure at times of high volatility, remain disciplined to rational and objective longer-term positioning, and finally, capitalizing on extraordinary opportunities when most people have given-up all hope on the markets. The strategy should never, ever, be “set-it & forget-it”. Of the original 12 companies when the Dow Jones Industrial Average was created in 1896, only one of those companies, GE, still remains from that original list. Remaining in the game is key, but changing out the players is just as key. The market has been incredibly resilient all throughout history, steadily moving higher longer-term, but there’s no reason we can’t be ultra-defensive at times, and aligning with better opportunities to come while we wait.