Due to some dramatic elements, this period has been compared by many analysts to the Great Depression of the 1930s.
There are some similarities, including a scenario where a debt supercycle reaches its later stages.
However, there are also several key differences between now and then. Some better, some worse, but mainly just different.
Monday, March 30, 2020
Friday, March 27, 2020
40 years and 40 days
I Became a Disciplined Investor Over 40 Years. The Virus Broke Me in 40 Days.
I’ve survived — and even prospered through — four stock-market crashes. But nothing prepared me for this.
It’s Thursday morning, March 19 — four weeks into the coronavirus crash of 2020. The Dow Jones industrial average has opened down another 700 points, after plunging below 20,000 a day before. It’s down 30 percent in a month, the steepest drop ever, even worse than during the Great Depression.
The fall has been nauseating. Yet I know this is a time to be buying stocks based on rules I’ve developed over decades of investing. But in order to do that, I have to log on to my brokerage account. When I do, the first number I’ll see is the current market value of my portfolio.
Isolated at a farmhouse in rural New York, surrounded by wilderness, I haven’t looked in days. I don’t want to look now.
I decide I’d better check the weather forecast instead. And then there’s email to catch up on. An hour later, I’ve done nothing.
I’m paralyzed.
I’ve owned stocks for nearly 40 years. I’ve lived through, survived and even prospered through four crashes.
So I should be prepared. Yet, looking back at the last few weeks, I recognize that I’ve violated most of my time-tested rules. Whipsawed between optimism and despair as the bad news mounted and my daily life was upended, I’ve let emotions influence my decisions. I’m doing it again this morning.
I first bought a stock mutual fund during the summer of 1982, as soon as I’d saved enough money to invest. My father, a Cadillac-driving sales manager for NBC’s local TV and radio affiliates, had been an avid believer in the stock market, and he’d drummed his faith into me.
It turned out that 1982 was a great year to buy, not that I realized it at the time. For years, I enjoyed the positive reinforcement of a steadily rising market. I loved looking up my mutual fund in the newspaper stock tables. Over the next five years the market tripled.
On Oct. 19, 1987, I was visiting my brother, who was spending a semester in France. When I left my hotel in Strasbourg early the next morning, I noticed the front pages on newsstands carried banner headlines reporting the Dow had dropped “23.” I wondered why the American market was front-page news in France. I looked more closely and saw the 23 preceded a percentage symbol. The Dow had dropped an unfathomable 508 points in one day. On a percentage basis, it was the stock market’s worst day ever.
I felt a powerful urge to salvage what was left of my modest savings by selling. But I was far away and had no choice but to hold.
Once I was back in the United States, the market seemed to stabilize. But volatility soon returned. In one of those downdrafts, I panicked and sold my entire fund.
By September 1989, the market had recovered all its losses. I watched from the sidelines, waiting in vain for a good time to get back in.
I vowed to never again trade in a panic. I made a rule — never sell on a down day — and a corollary: Never buy on an up day.
That served me well over the next decade’s record bull market, fueled by the tech boom. Times were even headier than during the 1980s. I often overheard personal trainers at the gym boasting about their favorite tech stocks.
The notion of diversification was largely unknown to me. In early 2000, when the tech bubble burst and the next crash came, I was fully invested and stayed that way. I watched as the value of my investments shriveled. I stopped looking at stock tables, which at least provided some psychological comfort. I dropped my monthly paper statements into the trash unopened.
But at least I adhered to my 1987 principle: I did not sell.
In the wake of the two-year bear market, I refined my strategy. I figured that if I bought every time the market average declined by 10 percent from its previous high — the standard definition of a correction — and then bought some more after each subsequent decline of 10 percent, then I’d never be buying at the top of the cycle.
I didn’t think of this as market timing, since I made no prediction where the market was headed. My strategy was a variation of the now-widespread practice of portfolio rebalancing — selling some asset classes and buying others to maintain a steady allocation.
I put this system into practice during the 2008 financial crisis. I recall shocked reactions that October when — with the market plunging and others boasting that they’d had the foresight to get out — I said I was buying.
My timing was hardly perfect. The market fell by 10 percent on five occasions — so I had plenty of opportunities to add to my stock positions. The last came in March 2009. In hindsight, the first of those 10 percent declines was a foolish time to have been buying, given that the market went down another 40 percent. But I reaped the gains even on those early purchases during the record-setting bull market that ended this month. Back in 2009, I didn’t have to worry about getting back into the market. I was already there.
What’s another virus scare?
There have been only five 10 percent corrections since then, and each was a buying opportunity for me. None was followed by a second 10 percent decline. The last of these corrections came at the end of 2018. As cash built up in my account, I wondered when, if ever, I’d get another such opportunity. I grew impatient. On Feb. 19, the S&P 500 closed at a record high. No one seemed to see a bear market or recession on the horizon, even as stock multiples teetered at record highs and a strange virus began to spread.
Until a week later.
Stocks fell, slowly at first, then gaining steam. By Feb. 25 the S&P 500 had dropped 7.6 percent from its peak.
From a financial standpoint, I wasn’t worried about the virus. Infections were leveling off in China. There were a few cases in the United States, most in a single nursing home in Washington State. Everyone was saying we had better medical care, better air quality and more effective means to prevent its spread than China. As an investor, I’d lived through many virus scares — SARS, MERS, swine flu, Ebola — and their ravages had no discernible impact on American stocks. Even the devastating AIDS epidemic had little effect on the broader economy or booming market.
So I bought stock (a broad-based index fund) on Feb. 25, jumping the gun on my own 10 percent buying target. My pent-up eagerness and optimism overwhelmed my disciplined strategy. I didn’t make a conscious decision to violate it. I didn’t even think about it in my haste to take advantage of what I assumed would be a fleeting opportunity.
Stocks dropped a little more the next day. Then, on Feb. 27, the S&P plunged nearly 5 percent. Now the market was officially in a correction, its fastest ever, down 12 percent from the peak the prior week. The coronavirus had spread globally, including to the United States.
I realized I should have waited. I felt foolish and guilty for violating my rules. I vowed not to do it again.
The biggest drop since Black Monday
But how smart I felt the next Monday. The S&P soared nearly 5 percent, amid rumors the Federal Reserve was about to cut interest rates.
The high was short-lived. By the end of the week, the S&P had erased Monday’s gains. By now I was worried, too, but I’m not an infectious disease expert. I figured stocks had priced in the risks. What I did know was that they were now deep into a correction, and so I bought more.
My buying may have been premature the first time, but now I was back on track, sticking to my playbook. At a time of soaring uncertainty on so many fronts, I felt like I was taking charge of my destiny.
That was the last time that buying stocks felt good, like I was pouncing on a fleeting opportunity. It soon became a source of profound anxiety.
Over the first weekend in March, headlines were all about the explosive spread of the virus in Italy. Photos of deserted piazzas drove home the gravity of the situation. What had seemed a distant threat now seemed close to home.
If that weren’t bad enough, Russia and Saudi Arabia decided to launch an oil price war just as demand was collapsing. Oil prices plummeted, dragging down the entire energy sector.
I expected it would be a bad Monday in the markets, but it was even worse. Circuit breakers kicked in to halt chaotic trading. The S&P closed down that day by 7 percent, the biggest drop since Black Monday in 1987.
I summoned the nerve to look at my brokerage account. I was shocked: The stock portion was down far more than the broad U.S. market averages. My international stock index fund was down 20 percent from its February peak, and the emerging markets fund had lost a quarter of its value.
I thought back to my experience 33 years earlier, when I’d panicked at the headlines in Strasbourg. I tried to remind myself that short-term volatility aside, the long-term trajectory of the market has always been up. When the market goes down, it’s time to think about buying more stocks — a time that came much sooner than I’d hoped or expected.
On Thursday, March 12, after President Trump banned most air travel between the United States and continental Europe, and after economies around the world started shutting down, the carnage in the stock market was even worse than Monday. The S&P dropped 10 percent, leaving it 27 percent below its peak a few weeks earlier.
According to my own rules, it was time to buy.
I hardly noticed. I was busy canceling a planned vacation the next week to the Virgin Islands. I began pondering the prospect of my own isolation, something that even a few days earlier had seemed unthinkable.
Worse, a friend in Spain, a healthy 40-year-old I had just visited in November, had fallen seriously ill with the virus. He was in a coma in a Madrid hospital.
I was worried about the spread of the disease. I wasn’t thinking about the stock market or my rapidly declining net worth.
Record-setting volatility
My strategy for trading isn’t meant to be rigid, only to be rational. It doesn’t matter if I miss a percentage point or two here or there, or if my timing is a little off, or if more important matters take precedence — as they have now. Two more friends told me they have the virus. Still, during the following days, when I pondered the rush of events during some long walks along a country road, I recognized I was running out of excuses for inaction. I knew I should be buying again, with the S&P remaining well below my 20 percent target. But trading was more volatile than anything I’d ever witnessed. The S&P logged a record seven straight days of swings of 4 percent or more.
That Friday, March 13, stock markets staged a late-afternoon rally as Mr. Trump promised new measures to contain the virus and shore up the economy. The S&P 500 closed almost exactly 20 percent below its peak. Still I did nothing.
It was just as well. On Monday, the market collapsed, erasing all of Friday’s gains. The Dow fell below the 20,000 milestone for the first time in three years. Markets were now down 30 percent. It was time for me to buy.
Having skipped the 20 percent buying “opportunity,” I knew it was time to step up. But I wasn’t going to do it on a day the markets had been in free fall. And in any event, I was back to avoiding my brokerage’s website.
The next day the stock market jumped higher. I felt a strong temptation to buy, gripped by the notion that the worst might be over. I worried I was missing the bottom by again failing to act on my strategy. But the 30 percent window had closed, and I reminded myself that my rule is never to buy on an up day.
The next day brought what seemed like good news: New infections in China had dropped to zero. Even so, that morning markets sank, again triggering my 30 percent buying target. This time I was determined to act.
And yet I dawdled. I checked the news, the weather, my emails. I told myself this was absurd. Whether I looked or not, my portfolio value was what it was.
So I looked. It was bad, but not nearly the shock of the last time (perhaps because percentage declines now translated to lower dollar amounts). I still had ample cash on hand as interest and dividends had accumulated over recent years.
So I stepped in and bought.
I won’t say I felt euphoric, but I felt better than I had in weeks, at least about my personal finances. I’d mustered the courage to face the truth, however grim. I’d acted according to a plan. I had more cash if needed for the next 10 percent decline.
My renewed confidence survived the next downdraft, which came the very next day.
‘Ashamed, foolish, like you screwed up’
This week I described my recent investing struggles to Frank Murtha, a managing partner of the consulting firm MarketPysch and an expert in behavioral finance. He said nothing I told him was unusual, even among seasoned investors.
My reluctance to look at my portfolio was common, he said. “Watching yourself have less money is painful,” he said. “It’s not just that you’re poorer. You also feel ashamed, foolish, like you screwed up. One of the toughest things is to separate your money from your ego and identity.”
He gave me credit for gathering the courage to face reality and then to buy. “Nothing relieves anxiety more than taking action,” he said. “You can take small actions that address the emotional need to do something without putting your finances at undue risk.”
Stocks are one of the few assets that psychologically become harder to buy as they become cheaper. “Every decision to buy is met with negative reinforcement,” Mr. Murtha said. Even he missed the great buying opportunity in March 2009. “I was too scared,” he said.
At least I didn’t commit what Mr. Murtha considers the most serious error, which is to sell into a steep decline. “That’s where people really get hurt,” he said. “Once you’re out, the emotional leverage works against you. Either the market drops further, which confirms your fear. Or it goes up, and you don’t want to buy after you just sold. Then it gets further and further away from you. People don’t realize how hard it is to get back in.”
The market soared. I felt no elation.
Nothing I experienced in the past prepared me for the speed of this market crash. The decline after stocks peaked in March 2000 lasted until October 2002 — two and a half years. The most recent bear market, which started in 2007, lasted 17 months. Nobody knows how long this bear market will last.
I take heart from this: During that previous bear market, the S&P was never down more than 50 percent from its 2007 peak. Even in the Great Depression, the worst bear market ever, the S&P dropped 86 percent. Small comfort, perhaps, but it never went to zero. And after those steep drops, the market not only recovered, but eventually went on to record highs.
This week brought some good news. My friend in Spain emerged from his coma. Doctors say his recovery will be slow, but they’re optimistic.
On Tuesday the market soared, followed by two more days of gains. This time I felt no elation. Some of the biggest rallies have come in the middle of the worst bear markets.
My next target is when the S&P falls 40 percent from its peak. I may be buying again soon.
-- by James B. Stewart, New York Times, 3/27/20
I’ve survived — and even prospered through — four stock-market crashes. But nothing prepared me for this.
It’s Thursday morning, March 19 — four weeks into the coronavirus crash of 2020. The Dow Jones industrial average has opened down another 700 points, after plunging below 20,000 a day before. It’s down 30 percent in a month, the steepest drop ever, even worse than during the Great Depression.
The fall has been nauseating. Yet I know this is a time to be buying stocks based on rules I’ve developed over decades of investing. But in order to do that, I have to log on to my brokerage account. When I do, the first number I’ll see is the current market value of my portfolio.
Isolated at a farmhouse in rural New York, surrounded by wilderness, I haven’t looked in days. I don’t want to look now.
I decide I’d better check the weather forecast instead. And then there’s email to catch up on. An hour later, I’ve done nothing.
I’m paralyzed.
I’ve owned stocks for nearly 40 years. I’ve lived through, survived and even prospered through four crashes.
So I should be prepared. Yet, looking back at the last few weeks, I recognize that I’ve violated most of my time-tested rules. Whipsawed between optimism and despair as the bad news mounted and my daily life was upended, I’ve let emotions influence my decisions. I’m doing it again this morning.
I first bought a stock mutual fund during the summer of 1982, as soon as I’d saved enough money to invest. My father, a Cadillac-driving sales manager for NBC’s local TV and radio affiliates, had been an avid believer in the stock market, and he’d drummed his faith into me.
It turned out that 1982 was a great year to buy, not that I realized it at the time. For years, I enjoyed the positive reinforcement of a steadily rising market. I loved looking up my mutual fund in the newspaper stock tables. Over the next five years the market tripled.
On Oct. 19, 1987, I was visiting my brother, who was spending a semester in France. When I left my hotel in Strasbourg early the next morning, I noticed the front pages on newsstands carried banner headlines reporting the Dow had dropped “23.” I wondered why the American market was front-page news in France. I looked more closely and saw the 23 preceded a percentage symbol. The Dow had dropped an unfathomable 508 points in one day. On a percentage basis, it was the stock market’s worst day ever.
I felt a powerful urge to salvage what was left of my modest savings by selling. But I was far away and had no choice but to hold.
Once I was back in the United States, the market seemed to stabilize. But volatility soon returned. In one of those downdrafts, I panicked and sold my entire fund.
By September 1989, the market had recovered all its losses. I watched from the sidelines, waiting in vain for a good time to get back in.
I vowed to never again trade in a panic. I made a rule — never sell on a down day — and a corollary: Never buy on an up day.
That served me well over the next decade’s record bull market, fueled by the tech boom. Times were even headier than during the 1980s. I often overheard personal trainers at the gym boasting about their favorite tech stocks.
The notion of diversification was largely unknown to me. In early 2000, when the tech bubble burst and the next crash came, I was fully invested and stayed that way. I watched as the value of my investments shriveled. I stopped looking at stock tables, which at least provided some psychological comfort. I dropped my monthly paper statements into the trash unopened.
But at least I adhered to my 1987 principle: I did not sell.
In the wake of the two-year bear market, I refined my strategy. I figured that if I bought every time the market average declined by 10 percent from its previous high — the standard definition of a correction — and then bought some more after each subsequent decline of 10 percent, then I’d never be buying at the top of the cycle.
I didn’t think of this as market timing, since I made no prediction where the market was headed. My strategy was a variation of the now-widespread practice of portfolio rebalancing — selling some asset classes and buying others to maintain a steady allocation.
I put this system into practice during the 2008 financial crisis. I recall shocked reactions that October when — with the market plunging and others boasting that they’d had the foresight to get out — I said I was buying.
My timing was hardly perfect. The market fell by 10 percent on five occasions — so I had plenty of opportunities to add to my stock positions. The last came in March 2009. In hindsight, the first of those 10 percent declines was a foolish time to have been buying, given that the market went down another 40 percent. But I reaped the gains even on those early purchases during the record-setting bull market that ended this month. Back in 2009, I didn’t have to worry about getting back into the market. I was already there.
What’s another virus scare?
There have been only five 10 percent corrections since then, and each was a buying opportunity for me. None was followed by a second 10 percent decline. The last of these corrections came at the end of 2018. As cash built up in my account, I wondered when, if ever, I’d get another such opportunity. I grew impatient. On Feb. 19, the S&P 500 closed at a record high. No one seemed to see a bear market or recession on the horizon, even as stock multiples teetered at record highs and a strange virus began to spread.
Until a week later.
Stocks fell, slowly at first, then gaining steam. By Feb. 25 the S&P 500 had dropped 7.6 percent from its peak.
From a financial standpoint, I wasn’t worried about the virus. Infections were leveling off in China. There were a few cases in the United States, most in a single nursing home in Washington State. Everyone was saying we had better medical care, better air quality and more effective means to prevent its spread than China. As an investor, I’d lived through many virus scares — SARS, MERS, swine flu, Ebola — and their ravages had no discernible impact on American stocks. Even the devastating AIDS epidemic had little effect on the broader economy or booming market.
So I bought stock (a broad-based index fund) on Feb. 25, jumping the gun on my own 10 percent buying target. My pent-up eagerness and optimism overwhelmed my disciplined strategy. I didn’t make a conscious decision to violate it. I didn’t even think about it in my haste to take advantage of what I assumed would be a fleeting opportunity.
Stocks dropped a little more the next day. Then, on Feb. 27, the S&P plunged nearly 5 percent. Now the market was officially in a correction, its fastest ever, down 12 percent from the peak the prior week. The coronavirus had spread globally, including to the United States.
I realized I should have waited. I felt foolish and guilty for violating my rules. I vowed not to do it again.
The biggest drop since Black Monday
But how smart I felt the next Monday. The S&P soared nearly 5 percent, amid rumors the Federal Reserve was about to cut interest rates.
The high was short-lived. By the end of the week, the S&P had erased Monday’s gains. By now I was worried, too, but I’m not an infectious disease expert. I figured stocks had priced in the risks. What I did know was that they were now deep into a correction, and so I bought more.
My buying may have been premature the first time, but now I was back on track, sticking to my playbook. At a time of soaring uncertainty on so many fronts, I felt like I was taking charge of my destiny.
That was the last time that buying stocks felt good, like I was pouncing on a fleeting opportunity. It soon became a source of profound anxiety.
Over the first weekend in March, headlines were all about the explosive spread of the virus in Italy. Photos of deserted piazzas drove home the gravity of the situation. What had seemed a distant threat now seemed close to home.
If that weren’t bad enough, Russia and Saudi Arabia decided to launch an oil price war just as demand was collapsing. Oil prices plummeted, dragging down the entire energy sector.
I expected it would be a bad Monday in the markets, but it was even worse. Circuit breakers kicked in to halt chaotic trading. The S&P closed down that day by 7 percent, the biggest drop since Black Monday in 1987.
I summoned the nerve to look at my brokerage account. I was shocked: The stock portion was down far more than the broad U.S. market averages. My international stock index fund was down 20 percent from its February peak, and the emerging markets fund had lost a quarter of its value.
I thought back to my experience 33 years earlier, when I’d panicked at the headlines in Strasbourg. I tried to remind myself that short-term volatility aside, the long-term trajectory of the market has always been up. When the market goes down, it’s time to think about buying more stocks — a time that came much sooner than I’d hoped or expected.
On Thursday, March 12, after President Trump banned most air travel between the United States and continental Europe, and after economies around the world started shutting down, the carnage in the stock market was even worse than Monday. The S&P dropped 10 percent, leaving it 27 percent below its peak a few weeks earlier.
According to my own rules, it was time to buy.
I hardly noticed. I was busy canceling a planned vacation the next week to the Virgin Islands. I began pondering the prospect of my own isolation, something that even a few days earlier had seemed unthinkable.
Worse, a friend in Spain, a healthy 40-year-old I had just visited in November, had fallen seriously ill with the virus. He was in a coma in a Madrid hospital.
I was worried about the spread of the disease. I wasn’t thinking about the stock market or my rapidly declining net worth.
Record-setting volatility
My strategy for trading isn’t meant to be rigid, only to be rational. It doesn’t matter if I miss a percentage point or two here or there, or if my timing is a little off, or if more important matters take precedence — as they have now. Two more friends told me they have the virus. Still, during the following days, when I pondered the rush of events during some long walks along a country road, I recognized I was running out of excuses for inaction. I knew I should be buying again, with the S&P remaining well below my 20 percent target. But trading was more volatile than anything I’d ever witnessed. The S&P logged a record seven straight days of swings of 4 percent or more.
That Friday, March 13, stock markets staged a late-afternoon rally as Mr. Trump promised new measures to contain the virus and shore up the economy. The S&P 500 closed almost exactly 20 percent below its peak. Still I did nothing.
It was just as well. On Monday, the market collapsed, erasing all of Friday’s gains. The Dow fell below the 20,000 milestone for the first time in three years. Markets were now down 30 percent. It was time for me to buy.
Having skipped the 20 percent buying “opportunity,” I knew it was time to step up. But I wasn’t going to do it on a day the markets had been in free fall. And in any event, I was back to avoiding my brokerage’s website.
The next day the stock market jumped higher. I felt a strong temptation to buy, gripped by the notion that the worst might be over. I worried I was missing the bottom by again failing to act on my strategy. But the 30 percent window had closed, and I reminded myself that my rule is never to buy on an up day.
The next day brought what seemed like good news: New infections in China had dropped to zero. Even so, that morning markets sank, again triggering my 30 percent buying target. This time I was determined to act.
And yet I dawdled. I checked the news, the weather, my emails. I told myself this was absurd. Whether I looked or not, my portfolio value was what it was.
So I looked. It was bad, but not nearly the shock of the last time (perhaps because percentage declines now translated to lower dollar amounts). I still had ample cash on hand as interest and dividends had accumulated over recent years.
So I stepped in and bought.
I won’t say I felt euphoric, but I felt better than I had in weeks, at least about my personal finances. I’d mustered the courage to face the truth, however grim. I’d acted according to a plan. I had more cash if needed for the next 10 percent decline.
My renewed confidence survived the next downdraft, which came the very next day.
‘Ashamed, foolish, like you screwed up’
This week I described my recent investing struggles to Frank Murtha, a managing partner of the consulting firm MarketPysch and an expert in behavioral finance. He said nothing I told him was unusual, even among seasoned investors.
My reluctance to look at my portfolio was common, he said. “Watching yourself have less money is painful,” he said. “It’s not just that you’re poorer. You also feel ashamed, foolish, like you screwed up. One of the toughest things is to separate your money from your ego and identity.”
He gave me credit for gathering the courage to face reality and then to buy. “Nothing relieves anxiety more than taking action,” he said. “You can take small actions that address the emotional need to do something without putting your finances at undue risk.”
Stocks are one of the few assets that psychologically become harder to buy as they become cheaper. “Every decision to buy is met with negative reinforcement,” Mr. Murtha said. Even he missed the great buying opportunity in March 2009. “I was too scared,” he said.
At least I didn’t commit what Mr. Murtha considers the most serious error, which is to sell into a steep decline. “That’s where people really get hurt,” he said. “Once you’re out, the emotional leverage works against you. Either the market drops further, which confirms your fear. Or it goes up, and you don’t want to buy after you just sold. Then it gets further and further away from you. People don’t realize how hard it is to get back in.”
The market soared. I felt no elation.
Nothing I experienced in the past prepared me for the speed of this market crash. The decline after stocks peaked in March 2000 lasted until October 2002 — two and a half years. The most recent bear market, which started in 2007, lasted 17 months. Nobody knows how long this bear market will last.
I take heart from this: During that previous bear market, the S&P was never down more than 50 percent from its 2007 peak. Even in the Great Depression, the worst bear market ever, the S&P dropped 86 percent. Small comfort, perhaps, but it never went to zero. And after those steep drops, the market not only recovered, but eventually went on to record highs.
This week brought some good news. My friend in Spain emerged from his coma. Doctors say his recovery will be slow, but they’re optimistic.
On Tuesday the market soared, followed by two more days of gains. This time I felt no elation. Some of the biggest rallies have come in the middle of the worst bear markets.
My next target is when the S&P falls 40 percent from its peak. I may be buying again soon.
-- by James B. Stewart, New York Times, 3/27/20
Thursday, March 26, 2020
market panics in hindsight
Do you remember where you were on Oct. 27, 1997?
Probably not. I don’t either. But on that day, the Dow plunged 550 points, which was roughly the same amount in percentage terms (7%) as today’s 2,000-point drop. In the late 1990s, the Asian financial crisis was the reason for that panic. But like many panics, as time passes, they seem to be much less meaningful in the rear view mirror.
Of course, this isn’t true for all panics. We will never forget events such as the 9/11 tragedy, or Sept. 15, 2008, when Lehman Brothers filed for bankruptcy, precipitating a swift run on the financial system and a severe economic contraction that the country hadn’t seen since the Great Depression. There was the Panic of 1893, which led to a depression that was arguably as severe as the Great Depression (and, in fact, was called just that until the Depression of the 1930s arrived). And, of course, there was the Great Depression itself.
But for each of these great panics, there are scores of smaller panics that seemed very significant at the time, but in hindsight look like nothing more than a blip on the radar.
The forgotten "panics"
Examples of such “mini-panics” that felt like full-blown panics at the time include the 1998 Russian debt crisis, where Moscow shocked the world by defaulting on their own ruble debt. The chaotic price movements in the markets crushed a hugely leveraged hedge fund called Long-Term Capital, which nearly drowned the banking system with its massive trading liabilities. The fund was bailed out by its own lenders (thanks to some strong-arming by the New York Fed) and this prevented the fund’s immediate liquidation, which stopped the panic.
Another panic occurred in 2011, where fears of a “double-dip” recession (remember that term?) coincided with political gridlock and a debt ceiling standoff that led to the first ever downgrade of the credit of the U.S. government. This seemed like a big deal at the time, and the market plunged roughly 17% from peak to trough, with many bank stocks and other cyclicals down 40% or more.
There was the Panic of 1907, where the failure of a major New York financial institution led to a city-wide run on the banking system, which drained liquidity from the economy and caused a sharp contraction as merchants couldn’t fund their inventory and corporations couldn’t make payroll. This crisis was historic because it eventually led to the creation of the Federal Reserve, but in fact the panic and subsequent downturn turned out to be very short-lived (I’ve written about this fascinating situation here and here).
And in the aforementioned 1997 panic, fast-growing Southeast Asian export nations (“Asian Tigers”) relied on foreign investment to finance their economic growth, but they went bust when rising U.S. interest rates made it harder to compete for foreign capital and a stronger dollar made exports less competitive for these dollar-pegged nations. The Tigers allowed money to freely flow into their countries in good times. But where money can easily enter, it can also quickly exit, and in 1997 an effective run-on-the-bank occurred in these nations, resulting in painful devaluations and economic collapses. This led to a major selloff across the world, and in fact was the last time (until today) that the U.S. stock market used its “circuit breaker” to shut down trading after markets plummeted.
There were even smaller scares such as the bond market debacle of 1994, the SARS outbreak in 2003, the “Flash Crash” in 2010 (also accompanied by the dreaded double-dip recession fear), the OPEC-fueled oil price rout (sound familiar?) that led to the worst start to the year in stock market history in 2016 and most recently, the trade war that caused a peak to trough drawdown of nearly 20% in the S&P 500 in the fourth quarter of 2018.
These mini-panics are only a small sample. There are countless examples that you can find when reading about the Go-Go years of the 1960s, the stagflation years of the 1970s and the junk bond years of the 1980s.
There are a number of lessons that can be learned by studying these past events, including the pattern of behavior that is so eerily similar in each of these panics, but there are two other takeaways I’ll mention here:
550 points used to be scary
Referencing Dow points is usually a useless exercise, but I use it to show how far the market has come from the days when a 550-point decline was a panic that required a temporary closure of the market.
My point is the stock market rewards investors who are long-term-oriented and patient. Investing isn’t easy, but it is simple. Owning a stake in a broad swath of American companies and ignoring the inevitable ups and downs is a surefire way to achieve success over time.
A quarter century from now, a 2000 point decline will likely be a much more normal 1% to 2% drop, just like a 550-point drop is today.
Stocks appreciate over time, and long-term investors get rewarded.
Time heals all wounds
Three years from now, we’ll all be looking back at this time as a great buying opportunity. It’s an extreme likelihood. I don’t know if this panic is going to get worse, and I never know in real time whether the panic is going to be the once-in-a-generation kind, but I do know that it is extremely unlikely. Nearly all panics wind up being “mini-panics” in hindsight, and they also turn out to be fabulous buying opportunities.
They are also viewed with relative indifference after a few years pass. Many people allow their memories of the fear to fade as time passes. Events that seemed important then are relatively meaningless now when filtered through the prism of time.
But they all seemed scary at the time.
And they were all great opportunities to buy stocks.
The time arbitrage loophole
I don’t know if this current coronavirus panic accelerates before it subsides, but I do know it will subside. And at some point, when enough time passes (often not much time is required), we’ll all agree that this was a great time to buy stocks.
What creates opportunity in markets is that in the current moment, we don’t all agree. Some view this as a buying opportunity, others think it’s a great time to sell stocks, or that it’s prudent to wait for “more clarity.” This disparity of interpretation is why stocks get mispriced. I’ve talked often about how Saber’s investment approach relies on time horizon edge, and this is a perfect example of why this approach can be successful over time. Stocks of great companies are getting sold because the earnings outlook looks bad this year, even when there is little debate about the long-term prospects for the business.
Some investors are in fact panic selling out of fear, others are more rationally selling because they don’t want to own a business that will have a bad year. And this creates opportunities for those who want to buy a stake in companies as a long-term part-owner.
Steve Jobs used to tell people to go for a walk and “zoom out”, to change your perspective and to look at the big picture. Sometimes it helps to zoom out and detach yourself from the current situation.
I don’t know what happens tomorrow or next week, or next month, or next year. But I am confident that we’ll look back in a few years and identify this as one of those times where it was great to be a buyer of stocks.
-- John Huber is the founder of Saber Capital Management, LLC. Saber is the general partner and manager of an investment fund modeled after the original Buffett partnerships. Saber’s strategy is to make very carefully selected investments in undervalued stocks of great businesses.
Probably not. I don’t either. But on that day, the Dow plunged 550 points, which was roughly the same amount in percentage terms (7%) as today’s 2,000-point drop. In the late 1990s, the Asian financial crisis was the reason for that panic. But like many panics, as time passes, they seem to be much less meaningful in the rear view mirror.
Of course, this isn’t true for all panics. We will never forget events such as the 9/11 tragedy, or Sept. 15, 2008, when Lehman Brothers filed for bankruptcy, precipitating a swift run on the financial system and a severe economic contraction that the country hadn’t seen since the Great Depression. There was the Panic of 1893, which led to a depression that was arguably as severe as the Great Depression (and, in fact, was called just that until the Depression of the 1930s arrived). And, of course, there was the Great Depression itself.
But for each of these great panics, there are scores of smaller panics that seemed very significant at the time, but in hindsight look like nothing more than a blip on the radar.
The forgotten "panics"
Examples of such “mini-panics” that felt like full-blown panics at the time include the 1998 Russian debt crisis, where Moscow shocked the world by defaulting on their own ruble debt. The chaotic price movements in the markets crushed a hugely leveraged hedge fund called Long-Term Capital, which nearly drowned the banking system with its massive trading liabilities. The fund was bailed out by its own lenders (thanks to some strong-arming by the New York Fed) and this prevented the fund’s immediate liquidation, which stopped the panic.
Another panic occurred in 2011, where fears of a “double-dip” recession (remember that term?) coincided with political gridlock and a debt ceiling standoff that led to the first ever downgrade of the credit of the U.S. government. This seemed like a big deal at the time, and the market plunged roughly 17% from peak to trough, with many bank stocks and other cyclicals down 40% or more.
There was the Panic of 1907, where the failure of a major New York financial institution led to a city-wide run on the banking system, which drained liquidity from the economy and caused a sharp contraction as merchants couldn’t fund their inventory and corporations couldn’t make payroll. This crisis was historic because it eventually led to the creation of the Federal Reserve, but in fact the panic and subsequent downturn turned out to be very short-lived (I’ve written about this fascinating situation here and here).
And in the aforementioned 1997 panic, fast-growing Southeast Asian export nations (“Asian Tigers”) relied on foreign investment to finance their economic growth, but they went bust when rising U.S. interest rates made it harder to compete for foreign capital and a stronger dollar made exports less competitive for these dollar-pegged nations. The Tigers allowed money to freely flow into their countries in good times. But where money can easily enter, it can also quickly exit, and in 1997 an effective run-on-the-bank occurred in these nations, resulting in painful devaluations and economic collapses. This led to a major selloff across the world, and in fact was the last time (until today) that the U.S. stock market used its “circuit breaker” to shut down trading after markets plummeted.
There were even smaller scares such as the bond market debacle of 1994, the SARS outbreak in 2003, the “Flash Crash” in 2010 (also accompanied by the dreaded double-dip recession fear), the OPEC-fueled oil price rout (sound familiar?) that led to the worst start to the year in stock market history in 2016 and most recently, the trade war that caused a peak to trough drawdown of nearly 20% in the S&P 500 in the fourth quarter of 2018.
These mini-panics are only a small sample. There are countless examples that you can find when reading about the Go-Go years of the 1960s, the stagflation years of the 1970s and the junk bond years of the 1980s.
There are a number of lessons that can be learned by studying these past events, including the pattern of behavior that is so eerily similar in each of these panics, but there are two other takeaways I’ll mention here:
- Notice the number of Dow points that a 7% drop was in 1997.
- Notice how little you care about (or even remember) the vast majority of these mini-panics.
550 points used to be scary
Referencing Dow points is usually a useless exercise, but I use it to show how far the market has come from the days when a 550-point decline was a panic that required a temporary closure of the market.
My point is the stock market rewards investors who are long-term-oriented and patient. Investing isn’t easy, but it is simple. Owning a stake in a broad swath of American companies and ignoring the inevitable ups and downs is a surefire way to achieve success over time.
A quarter century from now, a 2000 point decline will likely be a much more normal 1% to 2% drop, just like a 550-point drop is today.
Stocks appreciate over time, and long-term investors get rewarded.
Time heals all wounds
Three years from now, we’ll all be looking back at this time as a great buying opportunity. It’s an extreme likelihood. I don’t know if this panic is going to get worse, and I never know in real time whether the panic is going to be the once-in-a-generation kind, but I do know that it is extremely unlikely. Nearly all panics wind up being “mini-panics” in hindsight, and they also turn out to be fabulous buying opportunities.
They are also viewed with relative indifference after a few years pass. Many people allow their memories of the fear to fade as time passes. Events that seemed important then are relatively meaningless now when filtered through the prism of time.
But they all seemed scary at the time.
And they were all great opportunities to buy stocks.
The time arbitrage loophole
I don’t know if this current coronavirus panic accelerates before it subsides, but I do know it will subside. And at some point, when enough time passes (often not much time is required), we’ll all agree that this was a great time to buy stocks.
What creates opportunity in markets is that in the current moment, we don’t all agree. Some view this as a buying opportunity, others think it’s a great time to sell stocks, or that it’s prudent to wait for “more clarity.” This disparity of interpretation is why stocks get mispriced. I’ve talked often about how Saber’s investment approach relies on time horizon edge, and this is a perfect example of why this approach can be successful over time. Stocks of great companies are getting sold because the earnings outlook looks bad this year, even when there is little debate about the long-term prospects for the business.
Some investors are in fact panic selling out of fear, others are more rationally selling because they don’t want to own a business that will have a bad year. And this creates opportunities for those who want to buy a stake in companies as a long-term part-owner.
Steve Jobs used to tell people to go for a walk and “zoom out”, to change your perspective and to look at the big picture. Sometimes it helps to zoom out and detach yourself from the current situation.
I don’t know what happens tomorrow or next week, or next month, or next year. But I am confident that we’ll look back in a few years and identify this as one of those times where it was great to be a buyer of stocks.
-- John Huber is the founder of Saber Capital Management, LLC. Saber is the general partner and manager of an investment fund modeled after the original Buffett partnerships. Saber’s strategy is to make very carefully selected investments in undervalued stocks of great businesses.
Wednesday, March 25, 2020
a technical look at this bear market
The current bear market is exhibiting many of the same "technical traits" as seen in both the "Dot.com" and "Financial Crisis."
In each previous case, the market experienced a parabolic advance to the initial peak. A correction ensued, which was dismissed by the mainstream media, and investors alike, as just a "pause that refreshes." They were seemingly proved correct as the markets rebounded shortly thereafter and even set all-time highs. Investors, complacent in the belief that "this time was different" (1999 - a new paradigm, 2007 - Goldilocks economy), continued to hold out hopes the bull market was set to continue.
That was a mistake.
Also, in each period, once the monthly "sell signal" was triggered from a high level, the ensuing correction process took months to complete. This not only reset the market, but valuations as well. In both previous periods, reflexive rallies occurred, which eventually failed. While the 2008 plunge following the Lehman crisis was most similar to the current environment, there was a brief rally following the passage of TARP, which sucked investors in before the additional 22% decline in the first two months of 2009.
Most importantly, the market got very oversold early in both previous bear markets, and stayed that way for the entirety of the bear market. Currently, the market has only just now gotten to a similar oversold condition.
What all the indicators currently suggest is that, while the current correction has been swift and brutal, bear markets are not resolved in a single month.
This is going to take some time.
Bear Market Rally
Over the past couple of weeks, we have been talking about a potential reflexive bounce.
From a purely technical basis, the extreme downside extension, and potential selling exhaustion, has set the markets up for a fairly strong reflexive bounce. This is where fun with math comes in.
As shown in the chart below, after a 35% decline in the markets from the previous highs, a rally to the 38.2% Fibonacci retracement would encompass a 20% advance. Such an advance will "lure" investors back into the market, thinking the "bear market" is over.
This is what "bear market rallies" do and generally inflict the most pain possible on unwitting investors. The reasons for this are many, but primarily investors who were trapped in the recent decline will use the rally to "flee" the markets permanently.
More importantly, as noted above, "bear markets" are not resolved in a single month. Currently, there are too many investors trying to figure out where "the bottom" is, so they can "buy" it.
Bear markets do not end in optimism; they end in despair.
Looking back at 2008, numerous indicators suggest the "bear market" has only just begun. While this does NOT rule out a fairly strong reflexive rally, it suggests that any rally will ultimately fail as the bear market completes its cycle.
This can be seen more clearly in the monthly chart below, which looks at both previous bull and bear markets using a Fibonacci retracement. As shown, from the peak of both previous bull market "bubbles," the market reversed 61.8% of the advance during the "Dot.com" crash, and more than 100% of the advance during the "Financial Crisis."
Given the current bull market cycle was longer, more levered, and more extended than both previous bull markets, a 38.2% decline is unlikely to fulfill the requirements of this reversion. Our ultimate target of 1600-1800 on the S&P 500 remains confirmed by the quarterly chart below.
The current correction process has only just triggered a quarterly sell signal combined with a break from an extreme deviation of the long-term bull-trend back to the 1930s. Both previous bull market peaks coincide with the long-term bull trend at about 1600 on the S&P currently. Given all the stimulus being infused into the markets currently, we broaden our bear market bottom target to 1600-1800, as noted.
The technical signals, which do indeed lag short-term turns in the market, all confirm the "bear market" is only just awakening. While bullish reflexive rallies are very likely, and should be used to your advantage, this is a "traders" market for the time being.
In other words, the new mantra for the market, for the time being, will be to "Sell Rallies" rather than "Buy The Dip."
Yes, the market will rally, and likely substantially so. Just don't forget to take action, make changes, and get on the right side of the trade, before the "bear returns."
Let me conclude by reminding you of Bob Farrell's Rule #8 from our recent newsletter:
Bear markets have three stages - sharp down, reflexive rebound and a drawn-out fundamental downtrend
Bear markets often START with a sharp and swift decline.
After this decline, there is an oversold bounce that retraces a portion of that decline.
The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.
Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.
The chart above shows the stages of the last two primary cyclical bear markets versus today (the 2020 scale has been adjusted to match.)
As would be expected, the "Phase 1" selloff has been brutal.
That selloff sets up a "reflexive bounce." For many individuals, they will "feel like" they are "safe." This is how "bear market rallies" lure investors back in just before they are mauled again in "Phase 3."
Just like in 2000, and 2008, the media/Wall Street will be telling you to just "hold on." Unfortunately, by the time "Phase 3" was finished, there was no one wanting to "buy" anything.
-- Lance Roberts, Real Investment Advice
In each previous case, the market experienced a parabolic advance to the initial peak. A correction ensued, which was dismissed by the mainstream media, and investors alike, as just a "pause that refreshes." They were seemingly proved correct as the markets rebounded shortly thereafter and even set all-time highs. Investors, complacent in the belief that "this time was different" (1999 - a new paradigm, 2007 - Goldilocks economy), continued to hold out hopes the bull market was set to continue.
That was a mistake.
Also, in each period, once the monthly "sell signal" was triggered from a high level, the ensuing correction process took months to complete. This not only reset the market, but valuations as well. In both previous periods, reflexive rallies occurred, which eventually failed. While the 2008 plunge following the Lehman crisis was most similar to the current environment, there was a brief rally following the passage of TARP, which sucked investors in before the additional 22% decline in the first two months of 2009.
Most importantly, the market got very oversold early in both previous bear markets, and stayed that way for the entirety of the bear market. Currently, the market has only just now gotten to a similar oversold condition.
What all the indicators currently suggest is that, while the current correction has been swift and brutal, bear markets are not resolved in a single month.
This is going to take some time.
Bear Market Rally
Over the past couple of weeks, we have been talking about a potential reflexive bounce.
From a purely technical basis, the extreme downside extension, and potential selling exhaustion, has set the markets up for a fairly strong reflexive bounce. This is where fun with math comes in.
As shown in the chart below, after a 35% decline in the markets from the previous highs, a rally to the 38.2% Fibonacci retracement would encompass a 20% advance. Such an advance will "lure" investors back into the market, thinking the "bear market" is over.
This is what "bear market rallies" do and generally inflict the most pain possible on unwitting investors. The reasons for this are many, but primarily investors who were trapped in the recent decline will use the rally to "flee" the markets permanently.
More importantly, as noted above, "bear markets" are not resolved in a single month. Currently, there are too many investors trying to figure out where "the bottom" is, so they can "buy" it.
Bear markets do not end in optimism; they end in despair.
Looking back at 2008, numerous indicators suggest the "bear market" has only just begun. While this does NOT rule out a fairly strong reflexive rally, it suggests that any rally will ultimately fail as the bear market completes its cycle.
This can be seen more clearly in the monthly chart below, which looks at both previous bull and bear markets using a Fibonacci retracement. As shown, from the peak of both previous bull market "bubbles," the market reversed 61.8% of the advance during the "Dot.com" crash, and more than 100% of the advance during the "Financial Crisis."
Given the current bull market cycle was longer, more levered, and more extended than both previous bull markets, a 38.2% decline is unlikely to fulfill the requirements of this reversion. Our ultimate target of 1600-1800 on the S&P 500 remains confirmed by the quarterly chart below.
The current correction process has only just triggered a quarterly sell signal combined with a break from an extreme deviation of the long-term bull-trend back to the 1930s. Both previous bull market peaks coincide with the long-term bull trend at about 1600 on the S&P currently. Given all the stimulus being infused into the markets currently, we broaden our bear market bottom target to 1600-1800, as noted.
The technical signals, which do indeed lag short-term turns in the market, all confirm the "bear market" is only just awakening. While bullish reflexive rallies are very likely, and should be used to your advantage, this is a "traders" market for the time being.
In other words, the new mantra for the market, for the time being, will be to "Sell Rallies" rather than "Buy The Dip."
Yes, the market will rally, and likely substantially so. Just don't forget to take action, make changes, and get on the right side of the trade, before the "bear returns."
Let me conclude by reminding you of Bob Farrell's Rule #8 from our recent newsletter:
Bear markets have three stages - sharp down, reflexive rebound and a drawn-out fundamental downtrend
- Bear markets often START with a sharp and swift decline.
- After this decline, there is an oversold bounce that retraces a portion of that decline.
- The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.
Bear markets often START with a sharp and swift decline.
After this decline, there is an oversold bounce that retraces a portion of that decline.
The longer-term decline then continues, at a slower and more grinding pace, as the fundamentals deteriorate.
Dow Theory also suggests that bear markets consist of three down legs with reflexive rebounds in between.
The chart above shows the stages of the last two primary cyclical bear markets versus today (the 2020 scale has been adjusted to match.)
As would be expected, the "Phase 1" selloff has been brutal.
That selloff sets up a "reflexive bounce." For many individuals, they will "feel like" they are "safe." This is how "bear market rallies" lure investors back in just before they are mauled again in "Phase 3."
Just like in 2000, and 2008, the media/Wall Street will be telling you to just "hold on." Unfortunately, by the time "Phase 3" was finished, there was no one wanting to "buy" anything.
-- Lance Roberts, Real Investment Advice
Saturday, March 21, 2020
the four stages of a bear market
Typically, bear markets have four stages.
Stage one is recognition. Almost everybody shrugs off a bear market’s initial slide as being an ordinary event. The markets rise, and they fall. Treating every bad week as the bear’s arrival would not only shred one’s nerves, but would cause poor performance, should the investor act upon that instinct. Nine times of out 10, realizing a quick 5% or 10% loss would result in a permanent 5% or 10% loss, as stocks quickly return to their previous level.
This market achieved stage one during its third week. Stocks were up slightly for the year, before suddenly dropping 11% in the last week of February. In response, advisory firms issued reassuring notes about how these things happen, and market volatility is natural. The stock market surged the following Monday, failed to hold its gains, and then collapsed in week three—that is, last week. The bear was on.
Stage two is panic. This occurs when shareholders realize that the standard advice failed. Buying on the dip wasn’t easy money, as it is nine times in 10. Rather, it led to greater damage. Along with the pain (and regret) of unexpected losses comes the surprise that the conventional wisdom was wrong. Investors’ faith is tested—and some are found wanting. They sell first, then ask questions later.
We are currently in stage two. It could hardly be otherwise. Along with 1987’s bust, the current stock market crash—it fully deserves that name, with the Dow at the time of this writing being down 34% from its peak—has been the fastest stock-market descent since The Great Depression. It is difficult to apply rational analysis when so much happens, so quickly.
Stage three is stabilization. Stocks halt their decline, thereby ending the impression that they will do nothing but fall. The panic subsides but the situation remains grim. Investors believed during the first stage that stock prices slide on a whim. Now they realize that equities stumbled for good reason, and that until that reason is eliminated, they will continue to struggle. Shareholders’ losses will not soon be recouped.
This period is marked by turbulence. Stocks rally, sometimes furiously, only to be knocked back down. Investor sentiment varies between guarded optimism that the end is at least remotely in sight, and despair that the hope was false. This is typically the bear market’s longest period, extending for several months. (Several years for The Great Depression, but we do not wish to emulate that example.)
Stage four is anticipation. This is when stocks start their recovery. As with the bear market’s beginning, almost nobody recognizes its end until after the fact. The news at the time tends to be almost unrelievedly grim, accompanied by articles about how stocks’ golden days have passed. However, some investors perceive economic improvement distantly in the future. They make their bids, and stocks begin to rise.
A classic case occurred in March 2009. The recession was in its terrifying midst. Real U.S. gross domestic product declined that quarter, and the next quarter, and the quarter after that. The Morningstar Ibbotson Conference was held that month to empty seats, with the keynote speaker predicting several more months of equity losses. The rally began the next day.
Example #1: Black Monday
This is how the four stages played out 33 years ago:
Example #2: Financial Crisis
And this is how they operated more recently, from late 2008 through early 2009:
This scheme applies to bear markets that are primarily caused by recession fears. In addition to the two historic bears charted above, the scheme can be used to map the much smaller slump of 1990, and 1981’s decline, and 1970’s sell-off. Of course, the details for each of those markets vary, sometimes substantially—it would be reductive to imply otherwise—but the pattern is roughly similar.
However, the blueprint does not work for bear markets that arise from other causes. For example, the stock market’s grinding decline from 1973 through 1974 doesn’t map well to the four stages, because it was caused by steadily increasing inflation fears. The 2000-02 technology-stock implosion also fails the test, because the major concern as the New Era concluded was that equity prices had risen too high, not—aside from some of the Internet stocks—that earnings would disappear.
The question then becomes, does the current bear market fall into the first category or the second?
The former would be greatly preferable. With that scenario, the enormous uncertainty about the spread of the coronavirus, and the economic damage that the containment efforts will wreak, disappears over the next few months. The problems will remain large and numbers, but they will at least be known quantities—and the financial markets are adept at planning for what is known.
Should the picture become clearer, the four-stage scheme figures to be relevant. Fairly soon, I should think, stocks will enter the third stage, that of stabilization. That doesn’t mean that they won’t decline further, but the struggle will at least be bounded. Within months, not years, the stock market recovery should begin.
On the other hand, should uncertainties remain high and unresolved, perhaps because the virus’s behavior confounds the scientists, or because the financial stimulus efforts prove ineffective, then all bets are off. I do not know how to analyze such a situation. I hope that I never shall.
-- John Rekenthaler, Morningstar
Stage one is recognition. Almost everybody shrugs off a bear market’s initial slide as being an ordinary event. The markets rise, and they fall. Treating every bad week as the bear’s arrival would not only shred one’s nerves, but would cause poor performance, should the investor act upon that instinct. Nine times of out 10, realizing a quick 5% or 10% loss would result in a permanent 5% or 10% loss, as stocks quickly return to their previous level.
This market achieved stage one during its third week. Stocks were up slightly for the year, before suddenly dropping 11% in the last week of February. In response, advisory firms issued reassuring notes about how these things happen, and market volatility is natural. The stock market surged the following Monday, failed to hold its gains, and then collapsed in week three—that is, last week. The bear was on.
Stage two is panic. This occurs when shareholders realize that the standard advice failed. Buying on the dip wasn’t easy money, as it is nine times in 10. Rather, it led to greater damage. Along with the pain (and regret) of unexpected losses comes the surprise that the conventional wisdom was wrong. Investors’ faith is tested—and some are found wanting. They sell first, then ask questions later.
We are currently in stage two. It could hardly be otherwise. Along with 1987’s bust, the current stock market crash—it fully deserves that name, with the Dow at the time of this writing being down 34% from its peak—has been the fastest stock-market descent since The Great Depression. It is difficult to apply rational analysis when so much happens, so quickly.
Stage three is stabilization. Stocks halt their decline, thereby ending the impression that they will do nothing but fall. The panic subsides but the situation remains grim. Investors believed during the first stage that stock prices slide on a whim. Now they realize that equities stumbled for good reason, and that until that reason is eliminated, they will continue to struggle. Shareholders’ losses will not soon be recouped.
This period is marked by turbulence. Stocks rally, sometimes furiously, only to be knocked back down. Investor sentiment varies between guarded optimism that the end is at least remotely in sight, and despair that the hope was false. This is typically the bear market’s longest period, extending for several months. (Several years for The Great Depression, but we do not wish to emulate that example.)
Stage four is anticipation. This is when stocks start their recovery. As with the bear market’s beginning, almost nobody recognizes its end until after the fact. The news at the time tends to be almost unrelievedly grim, accompanied by articles about how stocks’ golden days have passed. However, some investors perceive economic improvement distantly in the future. They make their bids, and stocks begin to rise.
A classic case occurred in March 2009. The recession was in its terrifying midst. Real U.S. gross domestic product declined that quarter, and the next quarter, and the quarter after that. The Morningstar Ibbotson Conference was held that month to empty seats, with the keynote speaker predicting several more months of equity losses. The rally began the next day.
Example #1: Black Monday
This is how the four stages played out 33 years ago:
Example #2: Financial Crisis
And this is how they operated more recently, from late 2008 through early 2009:
This scheme applies to bear markets that are primarily caused by recession fears. In addition to the two historic bears charted above, the scheme can be used to map the much smaller slump of 1990, and 1981’s decline, and 1970’s sell-off. Of course, the details for each of those markets vary, sometimes substantially—it would be reductive to imply otherwise—but the pattern is roughly similar.
However, the blueprint does not work for bear markets that arise from other causes. For example, the stock market’s grinding decline from 1973 through 1974 doesn’t map well to the four stages, because it was caused by steadily increasing inflation fears. The 2000-02 technology-stock implosion also fails the test, because the major concern as the New Era concluded was that equity prices had risen too high, not—aside from some of the Internet stocks—that earnings would disappear.
The question then becomes, does the current bear market fall into the first category or the second?
The former would be greatly preferable. With that scenario, the enormous uncertainty about the spread of the coronavirus, and the economic damage that the containment efforts will wreak, disappears over the next few months. The problems will remain large and numbers, but they will at least be known quantities—and the financial markets are adept at planning for what is known.
Should the picture become clearer, the four-stage scheme figures to be relevant. Fairly soon, I should think, stocks will enter the third stage, that of stabilization. That doesn’t mean that they won’t decline further, but the struggle will at least be bounded. Within months, not years, the stock market recovery should begin.
On the other hand, should uncertainties remain high and unresolved, perhaps because the virus’s behavior confounds the scientists, or because the financial stimulus efforts prove ineffective, then all bets are off. I do not know how to analyze such a situation. I hope that I never shall.
-- John Rekenthaler, Morningstar
crises and the stock market
Comparing the Current Pandemic to the Spanish Flu Pandemic of 1918 and 1919
World War I was raging when the Spanish flu pandemic arrived, infecting some 500 million people worldwide (27% of the population) and killing roughly 40 million people, including 675,000 in the US alone.
There are a lot of takeaways from the Spanish flu pandemic’s effect on the world, but the stock market’s response may be the most surprising. If you look at the Dow Jones Industrial Average during the apex of the outbreaks (there were a few waves) in 1918 and 1919, you find that the index rose by just under 17% with dividends reinvested. Economic production from the war no doubt boosted activity during that time, and euphoria when the war ended in 1918 likely also contributed.
In all, this history lesson should serve as a stark reminder that the world can endure a world war and a lethal pandemic and still fight and grow through it. When the final wave of the Spanish flu subsided in February 1919, the market surged some 50% through November of that year. When a fear fades, stocks can surge.
This is a Good Reminder of How the Stock Market Works
In times like these, it’s also important for investors to take a step back and remember how the stock market works. Investors get long stretches of gains when the market trends higher (approximately +400% in this most recent bull run), and then from time to time, we experience clusters of scary downside volatility and bear markets when 20+% is quickly wiped out. But then when the crisis fades and fears abate, the next twelve months consistently delivers a strong comeback:
Long-term investors – and hopefully the folks who read my columns regularly – know that during a panic, an investor should look to snap up bargains as almost everyone runs for the exits. It’s the strategy of being “greedy when others are fearful,” as Warren Buffet put it. It sounds easy in theory, but it is very difficult in practice. In my view, now is a good time to buy stocks – it’s a better time than almost any other time since the ’08 crisis – it’s just psychologically almost impossible to implement. The history of the US economic system is a history of the triumph of the optimists. I believe the panic we see today will recede and money will transfer from those who panic to those who have a steady hand.
The issue is that there is no way to know when the market will stage its strong recovery, though history does tell us that it usually happens in close proximity to the scariest down days (much like the +9% surge we saw last Friday).6 Here’s a key stat to remember: over the last 20 years, 24 of the 25 worst trading days were within one month of the 25 best trading days.7 This speaks to the perils of trying to time exit and entry points during heightened volatility like we’re seeing right now. Doing so means potentially – if not probably – missing out on the market’s best rallies that every equity investor needs to drive long-term investing success.
-- Mitch on the Markets, 3/19/20
* * *
The top 10 worst bear markets (using the Dow), following the Great Depression, shows that it declines on average by -39.27%. And it lasts on average of 16.9 months. [The market dropped 89.2% from top to bottom during the Great Depression.]
The biggest bear market in that study was the last one (10/2007-3/2009) during the housing/financial crisis. It was dubbed the Great Recession and the market plunged by -54.43%. But it’s worth noting that our economy and financial system back then were on pretty shaky ground. A starkly different situation than how we entered this one.
This bear market, at its worst, saw the Dow down by -35.98%, the S&P down by -32.29%, and the Nasdaq down by -31.67%.
Not that far from the average. Although, a ways to go to the worst case study.
But the rallies that followed have been even bigger. Within a year after a bear market, stocks surge on average of 44.74%. And go on to gain on average 66.34% by year 3.
Following the Great Recession, the market gained 63.40% in year 1; 100.58% by year 3; 153.58% by year 5; and more than 357% during the entire 11+ year bull market.
And given the strength of the economy going into this, it’s all the more likely that we’ll bounce back big and in record time.
Trading The Bear
Just like stocks need to fall by -20% for a bull market to end and a bear market to begin, they also need to go up by 20% for a bear market to end and a bull market to begin.
For the Dow, it needs to close at or above 23,008.78 for a new bull market to begin.
For the S&P, it’s 2,765.90.
And for the Nasdaq, it’s 8,255.42.
Set yourself an alert. When we close above those levels, the bear market will officially be over and a new bull market will have begun.
But that doesn’t mean you have to wait to start nibbling at your favorite stocks and their discount bargain prices.
Some may go lower. And some may not. But they are likely much lower now than where they were just a few short weeks ago. And much closer to the bottom (if they haven’t already hit it).
Riding The Bull
The big gains that follow a bear market can be quite spectacular.
But since a large part of any bull market recovery typically comes at the very beginning, it’s imperative that you stay in the market.
The trick is to get into the right stocks.
There’s nothing wrong with raising cash by getting out of your laggards and poorest performers – stocks you know you should have gotten out of long before this pullback even happened. Or getting rid of those stocks that will have an uphill battle recovering even when this is over.
But then make sure to replace them with the strongest stocks that will be the new market leaders.
The point is, you want to be building your dream portfolio now, near the bottom.
And by the time the new bull market is underway, you’ll be all in with the strongest stocks, and beating the market.
-- Kevin Matras, Weekend Wisdom, 3/20/20
* * *
Like last week, this week was another one for the history books. The SPX continued the triple-digit see-saw action that began last week and through Wednesday (3/18) had moved more than 4% (up or down) for 8 consecutive sessions. According to my calculations that has never happened before. However, the down days have been larger than the up days and as a result the SPX remains solidly in bear market territory. While the SPX did test the December 2018 correction low of 2,351 four times, it ultimately held (which is encouraging) so that support level remains.
Since the SPX remains in bear market territory, here is where this new bear market stands relative to other bear markets in history. As you can see, despite being only 29 days old, with a decline of 28.8% through Thursday (3/19) it has already surpassed 5 other bear markets in magnitude.
Outlook:
While the virus outbreak seems to be accelerating outside of China, numerous monetary and fiscal initiatives have been announced to keep businesses solvent and employees paid. And while there are finally some indications of bargain hunting, two consecutive up days have not occurred since mid-February. Caution and patience is still advised.
-- Randy Frederick, Weekly Trader's Outlook, 3/20/20
World War I was raging when the Spanish flu pandemic arrived, infecting some 500 million people worldwide (27% of the population) and killing roughly 40 million people, including 675,000 in the US alone.
There are a lot of takeaways from the Spanish flu pandemic’s effect on the world, but the stock market’s response may be the most surprising. If you look at the Dow Jones Industrial Average during the apex of the outbreaks (there were a few waves) in 1918 and 1919, you find that the index rose by just under 17% with dividends reinvested. Economic production from the war no doubt boosted activity during that time, and euphoria when the war ended in 1918 likely also contributed.
In all, this history lesson should serve as a stark reminder that the world can endure a world war and a lethal pandemic and still fight and grow through it. When the final wave of the Spanish flu subsided in February 1919, the market surged some 50% through November of that year. When a fear fades, stocks can surge.
This is a Good Reminder of How the Stock Market Works
In times like these, it’s also important for investors to take a step back and remember how the stock market works. Investors get long stretches of gains when the market trends higher (approximately +400% in this most recent bull run), and then from time to time, we experience clusters of scary downside volatility and bear markets when 20+% is quickly wiped out. But then when the crisis fades and fears abate, the next twelve months consistently delivers a strong comeback:
Long-term investors – and hopefully the folks who read my columns regularly – know that during a panic, an investor should look to snap up bargains as almost everyone runs for the exits. It’s the strategy of being “greedy when others are fearful,” as Warren Buffet put it. It sounds easy in theory, but it is very difficult in practice. In my view, now is a good time to buy stocks – it’s a better time than almost any other time since the ’08 crisis – it’s just psychologically almost impossible to implement. The history of the US economic system is a history of the triumph of the optimists. I believe the panic we see today will recede and money will transfer from those who panic to those who have a steady hand.
The issue is that there is no way to know when the market will stage its strong recovery, though history does tell us that it usually happens in close proximity to the scariest down days (much like the +9% surge we saw last Friday).6 Here’s a key stat to remember: over the last 20 years, 24 of the 25 worst trading days were within one month of the 25 best trading days.7 This speaks to the perils of trying to time exit and entry points during heightened volatility like we’re seeing right now. Doing so means potentially – if not probably – missing out on the market’s best rallies that every equity investor needs to drive long-term investing success.
-- Mitch on the Markets, 3/19/20
* * *
The top 10 worst bear markets (using the Dow), following the Great Depression, shows that it declines on average by -39.27%. And it lasts on average of 16.9 months. [The market dropped 89.2% from top to bottom during the Great Depression.]
The biggest bear market in that study was the last one (10/2007-3/2009) during the housing/financial crisis. It was dubbed the Great Recession and the market plunged by -54.43%. But it’s worth noting that our economy and financial system back then were on pretty shaky ground. A starkly different situation than how we entered this one.
This bear market, at its worst, saw the Dow down by -35.98%, the S&P down by -32.29%, and the Nasdaq down by -31.67%.
Not that far from the average. Although, a ways to go to the worst case study.
But the rallies that followed have been even bigger. Within a year after a bear market, stocks surge on average of 44.74%. And go on to gain on average 66.34% by year 3.
Following the Great Recession, the market gained 63.40% in year 1; 100.58% by year 3; 153.58% by year 5; and more than 357% during the entire 11+ year bull market.
And given the strength of the economy going into this, it’s all the more likely that we’ll bounce back big and in record time.
Trading The Bear
Just like stocks need to fall by -20% for a bull market to end and a bear market to begin, they also need to go up by 20% for a bear market to end and a bull market to begin.
For the Dow, it needs to close at or above 23,008.78 for a new bull market to begin.
For the S&P, it’s 2,765.90.
And for the Nasdaq, it’s 8,255.42.
Set yourself an alert. When we close above those levels, the bear market will officially be over and a new bull market will have begun.
But that doesn’t mean you have to wait to start nibbling at your favorite stocks and their discount bargain prices.
Some may go lower. And some may not. But they are likely much lower now than where they were just a few short weeks ago. And much closer to the bottom (if they haven’t already hit it).
Riding The Bull
The big gains that follow a bear market can be quite spectacular.
But since a large part of any bull market recovery typically comes at the very beginning, it’s imperative that you stay in the market.
The trick is to get into the right stocks.
There’s nothing wrong with raising cash by getting out of your laggards and poorest performers – stocks you know you should have gotten out of long before this pullback even happened. Or getting rid of those stocks that will have an uphill battle recovering even when this is over.
But then make sure to replace them with the strongest stocks that will be the new market leaders.
The point is, you want to be building your dream portfolio now, near the bottom.
And by the time the new bull market is underway, you’ll be all in with the strongest stocks, and beating the market.
-- Kevin Matras, Weekend Wisdom, 3/20/20
* * *
Like last week, this week was another one for the history books. The SPX continued the triple-digit see-saw action that began last week and through Wednesday (3/18) had moved more than 4% (up or down) for 8 consecutive sessions. According to my calculations that has never happened before. However, the down days have been larger than the up days and as a result the SPX remains solidly in bear market territory. While the SPX did test the December 2018 correction low of 2,351 four times, it ultimately held (which is encouraging) so that support level remains.
Since the SPX remains in bear market territory, here is where this new bear market stands relative to other bear markets in history. As you can see, despite being only 29 days old, with a decline of 28.8% through Thursday (3/19) it has already surpassed 5 other bear markets in magnitude.
Outlook:
While the virus outbreak seems to be accelerating outside of China, numerous monetary and fiscal initiatives have been announced to keep businesses solvent and employees paid. And while there are finally some indications of bargain hunting, two consecutive up days have not occurred since mid-February. Caution and patience is still advised.
-- Randy Frederick, Weekly Trader's Outlook, 3/20/20
Wednesday, March 18, 2020
Schwab's Coronavirus outlook
As COVID-19 spread around the world in the early months of 2020, governments enacted quarantines, travel bans, school closings and other measures. Global supply chains were disrupted. Reduced demand is weighing on many industries, starting with travel, hospitality and leisure. Oil prices dropped after Saudi Arabia boosted production, in effect launching a price war with Russia. U.S. Treasury yields fell to record lows.
Amid the uncertainty, analysts have cut earnings estimates—especially for the first quarter—while many companies have withdrawn earnings guidance altogether. With the “E” (earnings) and the “P” (price) in the price-to-earnings (P/E) ratio both dropping, assessing stocks’ valuations on forward-looking earnings has become nearly impossible.
So what do we expect going forward? It’s especially difficult to make forecasts during a global shock like the coronavirus, but here’s what we know now:
Global recession risk has risen
Although it’s likely we are entering a global recession, it’s too early to predict the magnitude. In response to the threat posed by COVID-19, the Organization for Economic Cooperation and Development (OECD) lowered its global gross domestic product (GDP) growth forecast recently by a half percentage point, to 2.4% for 2020. Generally speaking, global growth below 2.5% is recessionary.
However, global growth may bounce back quickly after the coronavirus recedes. Economic data was encouraging prior to the outbreak, with signs of a recovery in global manufacturing activity and continued strong U.S. jobs data—both of which are at risk again. Any rebound could be helped by a flood of fiscal and monetary stimulus—central banks in the U.S., China, Australia, and Mexico have already cut interest rates, while government fiscal stimulus has been added in Italy, Japan, South Korea, and the United States. More is likely on the way.
U.S. Treasury yields could stay low for a long time
We expect central banks and governments to continue efforts to cushion the potential economic blow. The Federal Reserve already has cut the federal funds rate—its benchmark short-term rate—to a range of 0% to 0.25% in an effort to support the economy through the crisis.
Fed officials announced on March 15 that they expected “to maintain this target range until [they are] confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” This could take quite a while, considering inflation has been below the Fed’s target for a few years and the unemployment rate is likely to rise. We expect the federal funds rate to remain near zero for an extended period of time.
Containment will be key
In past epidemics, such as SARS in 2003, stocks didn’t bottom until global new-case growth stabilized. While new coronavirus cases have continued to rise outside China, new-case growth seems to have peaked in mainland China. Aggressive measures taken in countries such as China and South Korea show that containment is possible.
Historically, stock indexes have tended to return to their previous trajectory within a few months of the peak in global new-case growth.
What investors can consider now
Appropriate portfolio diversification among various asset classes is very important. This includes domestic and global stocks, large-cap and small-cap stocks, and various fixed income investments, among others. These assets generally don’t all move in the same direction at the same time, so when one investment is performing poorly, another may perform more strongly. Diversification can help buffer your portfolio from the ups and downs of market volatility.
We strongly recommend periodically rebalancing your portfolio back to its long-term asset allocation targets. Rebalancing means buying and/or selling assets to return your portfolio weightings back to their original desired levels—for example, 60% stocks/40% bonds, or another target allocation that is appropriate for your goals and investing time frame. Schwab clients can log in and use the Schwab Portfolio Checkup tool to find out whether their asset allocation still matches the original target. If you’re not sure how to rebalance your portfolio, a financial advisor or a Schwab Financial Consultant can help.
U.S. large-capitalization stocks continue to be preferred over small-cap stocks. Overall, large caps have lower debt levels, better profitability; while they’re also more nimble with regard to tariff- and virus-related adjustments to their supply chains.
Within your fixed income portfolio, we strongly suggest moving up in credit quality and exercising caution around riskier securities, such as high-yield bonds, because if economic growth slows it may become harder for less-creditworthy borrowers to make interest payments. Also, consider cash investments, such as money market funds, or short-term Treasuries or certificates of deposit (CDs). These have relatively low interest-rate sensitivity and historically have been relatively stable during periods of market upheaval.
Don’t overlook the importance of diversification within the international portion of your portfolio. Headlines make for poor investment advice, and foreign stocks may outperform domestic stocks even during periods of global uncertainty.
Amid the uncertainty, analysts have cut earnings estimates—especially for the first quarter—while many companies have withdrawn earnings guidance altogether. With the “E” (earnings) and the “P” (price) in the price-to-earnings (P/E) ratio both dropping, assessing stocks’ valuations on forward-looking earnings has become nearly impossible.
So what do we expect going forward? It’s especially difficult to make forecasts during a global shock like the coronavirus, but here’s what we know now:
Global recession risk has risen
Although it’s likely we are entering a global recession, it’s too early to predict the magnitude. In response to the threat posed by COVID-19, the Organization for Economic Cooperation and Development (OECD) lowered its global gross domestic product (GDP) growth forecast recently by a half percentage point, to 2.4% for 2020. Generally speaking, global growth below 2.5% is recessionary.
However, global growth may bounce back quickly after the coronavirus recedes. Economic data was encouraging prior to the outbreak, with signs of a recovery in global manufacturing activity and continued strong U.S. jobs data—both of which are at risk again. Any rebound could be helped by a flood of fiscal and monetary stimulus—central banks in the U.S., China, Australia, and Mexico have already cut interest rates, while government fiscal stimulus has been added in Italy, Japan, South Korea, and the United States. More is likely on the way.
U.S. Treasury yields could stay low for a long time
We expect central banks and governments to continue efforts to cushion the potential economic blow. The Federal Reserve already has cut the federal funds rate—its benchmark short-term rate—to a range of 0% to 0.25% in an effort to support the economy through the crisis.
Fed officials announced on March 15 that they expected “to maintain this target range until [they are] confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” This could take quite a while, considering inflation has been below the Fed’s target for a few years and the unemployment rate is likely to rise. We expect the federal funds rate to remain near zero for an extended period of time.
Containment will be key
In past epidemics, such as SARS in 2003, stocks didn’t bottom until global new-case growth stabilized. While new coronavirus cases have continued to rise outside China, new-case growth seems to have peaked in mainland China. Aggressive measures taken in countries such as China and South Korea show that containment is possible.
Historically, stock indexes have tended to return to their previous trajectory within a few months of the peak in global new-case growth.
What investors can consider now
Appropriate portfolio diversification among various asset classes is very important. This includes domestic and global stocks, large-cap and small-cap stocks, and various fixed income investments, among others. These assets generally don’t all move in the same direction at the same time, so when one investment is performing poorly, another may perform more strongly. Diversification can help buffer your portfolio from the ups and downs of market volatility.
We strongly recommend periodically rebalancing your portfolio back to its long-term asset allocation targets. Rebalancing means buying and/or selling assets to return your portfolio weightings back to their original desired levels—for example, 60% stocks/40% bonds, or another target allocation that is appropriate for your goals and investing time frame. Schwab clients can log in and use the Schwab Portfolio Checkup tool to find out whether their asset allocation still matches the original target. If you’re not sure how to rebalance your portfolio, a financial advisor or a Schwab Financial Consultant can help.
U.S. large-capitalization stocks continue to be preferred over small-cap stocks. Overall, large caps have lower debt levels, better profitability; while they’re also more nimble with regard to tariff- and virus-related adjustments to their supply chains.
Within your fixed income portfolio, we strongly suggest moving up in credit quality and exercising caution around riskier securities, such as high-yield bonds, because if economic growth slows it may become harder for less-creditworthy borrowers to make interest payments. Also, consider cash investments, such as money market funds, or short-term Treasuries or certificates of deposit (CDs). These have relatively low interest-rate sensitivity and historically have been relatively stable during periods of market upheaval.
Don’t overlook the importance of diversification within the international portion of your portfolio. Headlines make for poor investment advice, and foreign stocks may outperform domestic stocks even during periods of global uncertainty.
Sunday, March 15, 2020
fed cuts interest rates to near zero
(Bloomberg) -- The Federal Reserve swept into action on Sunday to save the U.S. economy from the fallout of the coronavirus, slashing its benchmark interest rate by a full percentage point to near zero and promising to boost its bond holdings by at least $700 billion.
In remarks underlining the sense of urgency, Fed Chairman Jerome Powell told a hastily assembled press briefing by telephone that the disruption to lives and businesses meant second quarter U.S. growth would probably be weak and it was hard to know how long the effects would last. That left a clear role for fiscal policy to help cushion the blow.
“The thing that fiscal policy, and really only fiscal policy can do, is reach out directly to affected industries, affected workers, and we’ve seen some of that so that’s an important job,” he said. “We do know that the virus will run its course and that the U.S. economy will resume a normal level of activity. In the meantime, the Fed will continue to use our tools to support the flow of credit.”
The Fed pulled out some of the biggest weapons in its arsenal. It’s key rate is now zero to 0.25%, matching the record low level it hit during the 2008 financial crisis and where it was held until December 2015.
The central bank also announced several other actions, including letting banks borrow from the discount window for as long as 90 days and reducing reserve requirement ratios to zero percent. In addition, it united with five other central banks to ensure dollars are available around the world via swap lines. Powell said that he did not think negative rates, which have been used in Europe and Japan, would be appropriate policy in the U.S.
President Donald Trump, who as recently as Saturday attacked the Fed for not lowering rates faster and further, quickly expressed support for the move.
Trump ‘Very Happy’
“It makes me very happy and I want to congratulate the Federal Reserve,” he said. “That’s a big step and I’m very happy they did it.”
Treasuries surged and U.S. equity futures tumbled at the start of another volatile week as investors responded to the rapidly escalating economic impact from the coronavirus and bet it will overwhelm the policy response. The Bank of Japan said it was bringing forward to Monday a meeting scheduled for later this week.
The Fed’s emergency action came as more and more evidence emerged that the U.S. economy is being hit hard by the virus. On Sunday alone, Ohio ordered all bars and restaurants closed indefinitely, Nike shuttered all its stores at least through March 27 and airlines announced drastic cuts to their international flight schedules. Businesses are instructing staff to work from home, and travel and entertainment are being particularly affected as people take steps to observe social distancing to avoid infection.
As the fallout spreads across the economy, the risk of a recession is mounting. Goldman Sachs slashed its GDP forecasts on Sunday. It’s now predicting zero growth in the first quarter and a 5% contraction in the second.
Powell, who said he planned to do some telecommuting himself to set a good work-from-home example, told reporters on the call that the rate decision Sunday is in lieu of the Fed’s regularly scheduled meeting this week, planned for Tuesday and Wednesday.
No Dot Plot
He also said that the quarterly forecasts that would have been released at that meeting had been scrapped in light of the current uncertainty caused by the virus and would probably next be updated in June.
With Sunday’s announcement, the Fed is firing some of the biggest guns in its arsenal, but economists say without a similar, forceful response from the government, the country’s record 11 year expansion could end in recession. Stocks have already tumbled into a bear market.
“The Fed had to make this move, and waiting would have been a grave mistake,” said Michael Darda, market strategist at MKM Partners. “The problem is there is a tsunami coming and the Fed is likely to be overwhelmed by it, and the markets know that.”
The Fed said it will keep interest rates near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
***
But what about your mortgage rate?
In remarks underlining the sense of urgency, Fed Chairman Jerome Powell told a hastily assembled press briefing by telephone that the disruption to lives and businesses meant second quarter U.S. growth would probably be weak and it was hard to know how long the effects would last. That left a clear role for fiscal policy to help cushion the blow.
“The thing that fiscal policy, and really only fiscal policy can do, is reach out directly to affected industries, affected workers, and we’ve seen some of that so that’s an important job,” he said. “We do know that the virus will run its course and that the U.S. economy will resume a normal level of activity. In the meantime, the Fed will continue to use our tools to support the flow of credit.”
The Fed pulled out some of the biggest weapons in its arsenal. It’s key rate is now zero to 0.25%, matching the record low level it hit during the 2008 financial crisis and where it was held until December 2015.
The central bank also announced several other actions, including letting banks borrow from the discount window for as long as 90 days and reducing reserve requirement ratios to zero percent. In addition, it united with five other central banks to ensure dollars are available around the world via swap lines. Powell said that he did not think negative rates, which have been used in Europe and Japan, would be appropriate policy in the U.S.
President Donald Trump, who as recently as Saturday attacked the Fed for not lowering rates faster and further, quickly expressed support for the move.
Trump ‘Very Happy’
“It makes me very happy and I want to congratulate the Federal Reserve,” he said. “That’s a big step and I’m very happy they did it.”
Treasuries surged and U.S. equity futures tumbled at the start of another volatile week as investors responded to the rapidly escalating economic impact from the coronavirus and bet it will overwhelm the policy response. The Bank of Japan said it was bringing forward to Monday a meeting scheduled for later this week.
The Fed’s emergency action came as more and more evidence emerged that the U.S. economy is being hit hard by the virus. On Sunday alone, Ohio ordered all bars and restaurants closed indefinitely, Nike shuttered all its stores at least through March 27 and airlines announced drastic cuts to their international flight schedules. Businesses are instructing staff to work from home, and travel and entertainment are being particularly affected as people take steps to observe social distancing to avoid infection.
As the fallout spreads across the economy, the risk of a recession is mounting. Goldman Sachs slashed its GDP forecasts on Sunday. It’s now predicting zero growth in the first quarter and a 5% contraction in the second.
Powell, who said he planned to do some telecommuting himself to set a good work-from-home example, told reporters on the call that the rate decision Sunday is in lieu of the Fed’s regularly scheduled meeting this week, planned for Tuesday and Wednesday.
No Dot Plot
He also said that the quarterly forecasts that would have been released at that meeting had been scrapped in light of the current uncertainty caused by the virus and would probably next be updated in June.
With Sunday’s announcement, the Fed is firing some of the biggest guns in its arsenal, but economists say without a similar, forceful response from the government, the country’s record 11 year expansion could end in recession. Stocks have already tumbled into a bear market.
“The Fed had to make this move, and waiting would have been a grave mistake,” said Michael Darda, market strategist at MKM Partners. “The problem is there is a tsunami coming and the Fed is likely to be overwhelmed by it, and the markets know that.”
The Fed said it will keep interest rates near zero “until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”
***
But what about your mortgage rate?
Saturday, March 14, 2020
best performing stocks of the decade
U.S. stocks have had what can only be called an excellent decade. MarketWatch, a Dow Jones site, will feature a number of forward-looking articles building on the past decade’s action. Today we’re taking a look back.
The Dow Jones Industrial Average (DJIA) returned 165% (with dividends reinvested) and the S&P 500 Index (SPX) returned 244% from the end of 2009 through Dec. 5, 2019. We’re not quite at the end of 2019, but if we were, and those figures held, the compounded annual growth rate for the Dow would be 10.2%. For the S&P 500, it would be 13.2%.
That average return for the S&P 500 measures up well when compared with the 10% average for the almost 100-year period of June 30, 1927, through Sept. 30, 2019, the longest period available using custom research.
For the past decade, we reviewed the entire S&P 500, as it is currently constituted, to see which stocks performed best. Among the 500 companies, 46 have traded in their present form for less than 10 years, so they are excluded.
Here’s a list of companies whose stocks performed the best, with reinvested dividends, from the end of 2009 through Dec. 5:
COMPANY TICKER INDUSTRY CATEGORY RETURN
Netflix Inc. US:NFLX Cable/Satellite TV 3,767% 3
MarketAxess Holdings US:MKTX Investment Banks/Brokers 3,182% 2
Abiomed Inc. US:ABMD Medical Specialties 2,121% 3
TransDigm Group Inc. US:TDG Aerospace & Defense 2,065% 0
Broadcom Inc. US:AVGO Semiconductors 1,919% 1
Align Technology Inc. US:ALGN Medical Specialties 1,458% 1
United Rentals Inc. US:URI Finance/Rental/Leasing 1,434% 1
Regeneron Pharmaceuticals US:REGN Biotechnology 1,430% 2
Ulta Beauty Inc. US:ULTA Specialty Stores 1,233% 1
Amazon.com Inc. US:AMZN Internet Retail 1,209% 1
Extra Space Storage Inc. US:EXR Real Estate Inv Trust 1,166% 1
Constellation Brands Inc. US:STZ Beverages: Alcoholic 1,124% 0
Nvidia Corp. US:NVDA Semiconductors 1,117% 2
Take-Two Interactive US:TTWO Recreational Products 1,114% 1
Ross Stores Inc. US:ROST Apparel/Footwear Retail 1,081% 0
Fortinet Inc. US:FTNT Computer Communications 1,079% 1
Mastercard Inc. Class A US:MA Finance/Rental/Leasing 1,078% 1
Charter Communications US:CHTR Cable/Satellite TV 1,077% 0
O'Reilly Automotive Inc. US:ORLY Specialty Stores 1,060% 1
Cintas Corp. US:CTAS Other Consumer Services 1,053% 0
The right-most column shows the number of times each stock was among the top 10 performers over the past 10 individual years (including 2019 through Dec. 5).
Netflix (ticker: NFLX) is far ahead of the pack, with a spectacular 3,767% return. That translates to a compounded annual growth rate (CAGR) of 44.1%. Amazon (AMZN) ranks 10th, and its 1,209% return translates to a CAGR of 29.3%. Apple (AAPL) ranks 28th, with a total return of 899% and a CAGR of 25.9%.
It’s interesting that some of the best performers for 10 years weren’t among the top 10 during any individual year. TransDigm (TDG), for example, ranks fourth, with a 2,067% return (CAGR of 36%). The company has a very important advantage in the aerospace industry—a high barrier for entry in the market for specialized replacement parts for aircraft. In April, Will Muggia of Westfield Capital Management called TransDigm “the best managed company in America.”
The Dow Jones Industrial Average (DJIA) returned 165% (with dividends reinvested) and the S&P 500 Index (SPX) returned 244% from the end of 2009 through Dec. 5, 2019. We’re not quite at the end of 2019, but if we were, and those figures held, the compounded annual growth rate for the Dow would be 10.2%. For the S&P 500, it would be 13.2%.
That average return for the S&P 500 measures up well when compared with the 10% average for the almost 100-year period of June 30, 1927, through Sept. 30, 2019, the longest period available using custom research.
For the past decade, we reviewed the entire S&P 500, as it is currently constituted, to see which stocks performed best. Among the 500 companies, 46 have traded in their present form for less than 10 years, so they are excluded.
Here’s a list of companies whose stocks performed the best, with reinvested dividends, from the end of 2009 through Dec. 5:
COMPANY TICKER INDUSTRY CATEGORY RETURN
Netflix Inc. US:NFLX Cable/Satellite TV 3,767% 3
MarketAxess Holdings US:MKTX Investment Banks/Brokers 3,182% 2
Abiomed Inc. US:ABMD Medical Specialties 2,121% 3
TransDigm Group Inc. US:TDG Aerospace & Defense 2,065% 0
Broadcom Inc. US:AVGO Semiconductors 1,919% 1
Align Technology Inc. US:ALGN Medical Specialties 1,458% 1
United Rentals Inc. US:URI Finance/Rental/Leasing 1,434% 1
Regeneron Pharmaceuticals US:REGN Biotechnology 1,430% 2
Ulta Beauty Inc. US:ULTA Specialty Stores 1,233% 1
Amazon.com Inc. US:AMZN Internet Retail 1,209% 1
Extra Space Storage Inc. US:EXR Real Estate Inv Trust 1,166% 1
Constellation Brands Inc. US:STZ Beverages: Alcoholic 1,124% 0
Nvidia Corp. US:NVDA Semiconductors 1,117% 2
Take-Two Interactive US:TTWO Recreational Products 1,114% 1
Ross Stores Inc. US:ROST Apparel/Footwear Retail 1,081% 0
Fortinet Inc. US:FTNT Computer Communications 1,079% 1
Mastercard Inc. Class A US:MA Finance/Rental/Leasing 1,078% 1
Charter Communications US:CHTR Cable/Satellite TV 1,077% 0
O'Reilly Automotive Inc. US:ORLY Specialty Stores 1,060% 1
Cintas Corp. US:CTAS Other Consumer Services 1,053% 0
The right-most column shows the number of times each stock was among the top 10 performers over the past 10 individual years (including 2019 through Dec. 5).
Netflix (ticker: NFLX) is far ahead of the pack, with a spectacular 3,767% return. That translates to a compounded annual growth rate (CAGR) of 44.1%. Amazon (AMZN) ranks 10th, and its 1,209% return translates to a CAGR of 29.3%. Apple (AAPL) ranks 28th, with a total return of 899% and a CAGR of 25.9%.
It’s interesting that some of the best performers for 10 years weren’t among the top 10 during any individual year. TransDigm (TDG), for example, ranks fourth, with a 2,067% return (CAGR of 36%). The company has a very important advantage in the aerospace industry—a high barrier for entry in the market for specialized replacement parts for aircraft. In April, Will Muggia of Westfield Capital Management called TransDigm “the best managed company in America.”
Friday, March 13, 2020
the end of the bull market
[3/18/20] stay calm because bear markets always come back (it just may take 25 years)
***
[3/13/20] Stocks have plummeted more than 20% from their February highs—officially entering bear-market territory just days after the 11th anniversary of the bull run. The volatility triggered circuit breakers put in place to pause trading during steep sell-offs, first on March 9 and again on March 12, after the S&P 500® fell 7% from the previous day’s close, halting markets for 15 minutes. (The second circuit breaker pauses trading for another 15 minutes if the S&P falls 13% below the previous day’s close, and the third stops trading for the day on a 20% decline.) And on March 12, the Dow Jones Industrial Average suffered its worst day since 1987 despite stimulus moves from the Fed.
***
The move for the Dow also represents the blue-chip index’s fastest move from a record high to a bear market since 1931 — 19 days. In November 1931, as the Great Depression was enveloping the U.S., the Dow took a brisk 15 days from a record to a drop of at least 20%.
There is some hope, however, that a stint in bear-market territory will be short-lived if the viral outbreak is effectively mitigated by governments and central banks across the globe. Historically, the period in the jaws of a bear can be lengthy.
On average, a bear market for the Dow lasts 206 trading days, while the average bear period for the S&P 500 is about 146 days, according to data from Dow Jones Market Data. The Dow is currently off 29% from its Feb. 12 record, while the S&P 500 and Nasdaq are 27% from their Feb. 19 peaks, as of late Thursday.
***
Already, the stock plunge has wiped out a year of market gains that had lifted the fortunes of many Americans and bolstered retirement portfolios. Through Wednesday's close, the U.S. stock market had shed $6.7 trillion in value since its February high, according to S&P Dow Jones Indices senior index analyst Howard Silverblatt.
A bear market differs from a "correction" in its severity, with the latter referring to a decline of 10% from stocks' most recent high. Such declines may also send different signals about the state of the economy.
Corrections are common during bull markets — they are viewed as painful, but normal, because they can puncture speculative bubbles like the run-up in dotcom stocks two decades ago. They also give investors a chance to buy stocks at lower prices.
Bear markets are much rarer, occurring on average about once a decade. They also often — though not always — foreshadow a recession.
The good news? Bear markets usually don't last as long bull markets, according to financial firm Invesco. The typical bear market lasts just shy of a year and wipes out about 34% of the stock market's value. But timing the end of a bear market and he beginning of a new bull market can be tricky, which is why investment pros generally advise long-term investors to hold onto their stocks.
And despite the coronavirus, Wall Street expects markets and the broader economy will rebound later this year.
"By year-end, economic and earnings growth will be accelerating, the Fed funds rate will be at the zero lower bound and the impact of any fiscal stimulus will be flowing through to consumers," Goldman Sachs analysts wrote in a note to clients on Wednesday.
Goldman's prediction for the S&P 500 at year-end? At around 3,200 points — or about 17% higher than Wednesday's closing price.
***
In the current context, many of us are tempted to seek “bargains” to buy. However, I regret to inform that the worst is yet to come.
The current bear market is about to enter into a second, and more difficult, stage. The first leg of this decline was primarily driven by professional selling – professional traders and fund managers selling and unwinding positions. The selling by professional investors is far from done. However, the second leg of the decline will be driven primarily by mass selling on the part of individual investors who will now start to massively and simultaneously liquidate their stock portfolios and fund holdings – from their private accounts and retirement accounts. Both mutual funds and ETFs will be forced to liquidate their portfolios in order to meet redemption and sales.
This is a real crisis – it's not going to be a short-term problem. The coming 12-18 months are going to be very long and difficult times.
[and of course... Never has it been so critically important, as it is right now, to have the right portfolio strategy. Successful Portfolio Strategy will provide you with the knowledge and the tools that you need to put a winning portfolio strategy in place and successfully manage its practical implementation. .... For one month only, we are offering our loyal followers, and early subscribers, a $50 discount off of the yearly subscription price of $399. So be sure to act now. -- James A. Kostohryz]
***
[3/12/20] The escalating coronavirus emergency sent the stock market Thursday into its worst slide since the Black Monday crash of 1987, extending a sell-off that has now wiped out most of Wall Street's big gains since President Donald Trump took office.
The S&P 500 plummeted 9.5 percent, for a total drop of 26.7 percent from its all-time high, set just last month. That puts it way over the 20% threshold for a bear market, officially ending Wall Street's unprecedented bull-market run of nearly 11 years. The Dow Jones Industrial Average sank 2,352 ponts, or 10 percent, its heaviest loss since its nearly 23 percent drop on Oct. 19, 1987.
Stocks fell so fast on Wall Street at the opening bell that they triggered an automatic, 15-minute trading halt for the second time this week. The so-called circuit breakers were first adopted after the 1987 crash, and until this week hadn't been tripped since 1997.
The Dow briefly turned upward and halved its losses at one point in the afternoon after the Federal Reserve announced it would step in to ease "highly unusual disruptions" in the Treasury market. But the burst of momentum quickly faded.
Trump often points proudly to the big run-up on Wall Street under his administration, warning a crowd at a rally last August that "whether you love me or hate, you gotta vote for me," or else your 401(k) will go "down the tubes."
Just last month, the Dow was boasting a nearly 50 percent increase since Trump took the oath of office on Jan. 20, 2017. By Thursday's close, the Dow was clinging to a 6.9 percent gain, though it was still up nearly 16 percent since just before Trump's election in November 2016.
The Dow officially went into a bear market on Wednesday, when it finished the day down more than 20 percent from its all-time high. For the S&P 500, this is the fastest drop since World War II from a record high to a bear market.
The combined health crisis and retreat on Wall Street heightened fears of a recession.
"This is bad. The worst and fastest stock market correction in our career," Chris Rupkey, chief financial economist at MUFG Union, said in a research note overnight. "The economy is doomed to recession if the country stops working and takes the next 30 days off. The stock market knows it.
The fallout mounted Thursday, as the NCAA canceled its men's and women's basketball tournaments, major league baseball postponed opening day, and Disneyland announced it is shutting down. Even Mount Everest closed. Closer to Wall Street, New York's Metropolitan Museum of Art, Carnegie Hall and the Metropolitan Opera shut their doors, and Broadway theaters planned to go dark.
In a somber prime-time address Wednesday night from the White House, Trump announced the new travel ban as well as measures to extend loans, payroll tax cuts and other financial relief to individuals and businesses hurt by the crisis.
But the travel restrictions represented another heavy blow to the already battered airline and travel industries, and the other measures did not impress Wall Street.
In a surprise move, the Fed said it would pump in at least $1.5 trillion to help calm the market and facilitate trading.
After earlier thinking that the virus could remain mostly in China and that any dip in the economy would be followed by a quick rebound, investors are seeing the damage and disruptions mount, with Italy locking itself down, the NBA suspending games and authorities in the U.S. and beyond banning large gatherings and closing schools.
"Anyone who tells you they know how long this is going to last is wrong," said Adam Taback, chief investment officer for Wells Fargo Private Bank. "The uncertainty here is trying to figure out how you get this virus under control, and is that a matter of days, weeks or months."
***
[3/12/20] Wall Street’s staggering skid that began less than three weeks ago has pulled the Dow Jones Industrial Average into what’s known as a bear market.
After a string of sharp losses, the Dow has now fallen more than 20% from its last peak on Feb. 12.
The S&P 500, the index most investors pay attention to, moved within striking distance of its own bear market Wednesday, as did the Nasdaq. Both indexes are in a correction, down at least 10% from their most recent all-time highs.
Here are some common questions asked about bear markets and corrections and what they mean for average investors:
HOW IS A BEAR MARKET DIFFERENT FROM A MARKET CORRECTION?
A correction is Wall Street's term for an index like the S&P 500, the Dow Jones Industrial Average, or even an individual stock, that's fallen 10% or more from a recent high. A bear market occurs when the index or stock falls 20% or more from the peak for a sustained period of time.
Corrections are common during bull markets, and are considered normal and even healthy. They allow markets to remove speculative froth after a big run-up and give investors a chance to buy stocks at lower prices.
The major U.S. stock indexes entered a correction this month amid mounting fears about the impact that the coronavirus outbreak could have on the global economy and company earnings growth. A oil market price war this week that led analysts to lower their profit forecasts for energy companies fueled more selling on Wall Street.
All told, the Dow fell 1,464.94 points Wednesday to 23,553.22. That's 20.3% below its record close of 29,551.42 on Feb. 12. The S&P 500 index slid 140.85 points to 2,741.38. It's now down 19% from its high of 3,386.15 on Feb. 19. The Nasdaq dropped 392.20 points to 7,952.05, or 19% below its peak of 9,817.18 on Feb. 19.
WHAT'S BOTHERING INVESTORS?
The outbreak of the coronavirus that originated in China has quickly grown into a pandemic that is threatening major sectors of the global economy, stoking fear that the U.S. and other economies could be tipped into a recession.
Many companies, including airlines, cruise operators and big consumer technology manufacturers, have warned their earnings will take a hit this year due to the economic fallout from the outbreak.
Investors remain uncertain over whether action taken by the Federal Reserve and the Trump administration to shield the economy will be effective or arrive quickly enough to prevent widespread economic pain.
More recently, a sharp drop in crude oil prices has further dimmed the overall outlook for corporate profits this year and next. Company profits tend to be the biggest driver of stock market gains.
HOW OFTEN DO MARKET CORRECTIONS BECOME BEAR MARKETS?
In the S&P 500, there have been 23 corrections since 1945 and 12 bear markets, not including the current near-bear market, said Sam Stovall, chief investment strategist for CFRA. That works out to corrections becoming bear markets a little less than 35% of the time.
Should the S&P 500 enter a bear market before April 11, it would mark the fastest drop of 20% by the index on record, Stovall said.
WHEN WAS THE LAST TIME WE HAD A BEAR MARKET?
The last bear market for the S&P 500 ran from Oct. 9, 2007 through March 9, 2009. The index fell 56.8%. in that 17-month period as the U.S. housing downturn and mortgage crisis erupted, triggering a credit crunch.
HOW LONG DO BEAR MARKETS LAST AND HOW DEEP DO THEY GO?
On average, bear markets have lasted 14 months in the period since World War II, while market corrections have lasted an average of five months. The S&P 500 index has fallen an average of 33% during bear markets in that time. The biggest decline since 1945 occurred in the 2007-2009 bear market.
History shows that the faster an index enters into a bear market, the shorter they tend to be. Historically, stocks take 270 days to fall into a bear market. When the S&P 500 has fallen 20% at a faster clip, the index has averaged a loss of 26%, Stovall said.
WHAT ARE THE SIGNS THAT A CORRECTION OR A BEAR MARKET HAS ENDED?
Generally, investors look for a 20% gain from a low point as well as sustained gains over at least a six-month period.
On average, bull markets last 4.5 years. In terms of the S&P 500, the current bull market has been going on for almost 11 years.
The shortest bear market for the S&P 500 was in 1990. It lasted almost three months, sliding 20% in that period. The longest was a 61-month bear market that ended in March 1942 and cut the index by 60%.
***
[3/14/20] A look at bull and bear market through history
***
[3/13/20 Profit from the Pros by Kevin Matras] So what now?
Let's look at a few stats. The top 10 worst bear markets (using the Dow) following the Great Depression shows that it declines on average by -39.27%. And it lasts on average of 16.9 months.
The biggest bear market in that study was the last one (10/2007-3/2009) during the housing/financial crisis. It was dubbed the Great Recession and the market plunged by -54.43%. But it's worth noting that our economy and financial system back then were on pretty shaky ground. A starkly different situation compared to now.
But while we're drawing contrasts, we don't yet know how this health scare will compare either.
Nonetheless, the market as of the close of business yesterday was down by -28.26%.
So we're not that far from the average. Although, there's a way to go to the worst case study.
But the rallies that followed have been even bigger. Within a year after a bear market, stocks surge on average of 44.74%. And go on to gain on average 66.34% by year 3.
BTW, following the Great Recession, the market gained 63.40% in year 1; 100.58% by year 3; 153.58% by year 5; and more than 357% during the entire 11+ year bull market.)
Anyway, there could very well be more downside.
But now is the time to start building your list of your dream stocks.
You don't have to go all in at once. But you can start taking nibbles.
***
[3/13/20] Stocks have plummeted more than 20% from their February highs—officially entering bear-market territory just days after the 11th anniversary of the bull run. The volatility triggered circuit breakers put in place to pause trading during steep sell-offs, first on March 9 and again on March 12, after the S&P 500® fell 7% from the previous day’s close, halting markets for 15 minutes. (The second circuit breaker pauses trading for another 15 minutes if the S&P falls 13% below the previous day’s close, and the third stops trading for the day on a 20% decline.) And on March 12, the Dow Jones Industrial Average suffered its worst day since 1987 despite stimulus moves from the Fed.
***
The move for the Dow also represents the blue-chip index’s fastest move from a record high to a bear market since 1931 — 19 days. In November 1931, as the Great Depression was enveloping the U.S., the Dow took a brisk 15 days from a record to a drop of at least 20%.
There is some hope, however, that a stint in bear-market territory will be short-lived if the viral outbreak is effectively mitigated by governments and central banks across the globe. Historically, the period in the jaws of a bear can be lengthy.
On average, a bear market for the Dow lasts 206 trading days, while the average bear period for the S&P 500 is about 146 days, according to data from Dow Jones Market Data. The Dow is currently off 29% from its Feb. 12 record, while the S&P 500 and Nasdaq are 27% from their Feb. 19 peaks, as of late Thursday.
***
Already, the stock plunge has wiped out a year of market gains that had lifted the fortunes of many Americans and bolstered retirement portfolios. Through Wednesday's close, the U.S. stock market had shed $6.7 trillion in value since its February high, according to S&P Dow Jones Indices senior index analyst Howard Silverblatt.
A bear market differs from a "correction" in its severity, with the latter referring to a decline of 10% from stocks' most recent high. Such declines may also send different signals about the state of the economy.
Corrections are common during bull markets — they are viewed as painful, but normal, because they can puncture speculative bubbles like the run-up in dotcom stocks two decades ago. They also give investors a chance to buy stocks at lower prices.
Bear markets are much rarer, occurring on average about once a decade. They also often — though not always — foreshadow a recession.
The good news? Bear markets usually don't last as long bull markets, according to financial firm Invesco. The typical bear market lasts just shy of a year and wipes out about 34% of the stock market's value. But timing the end of a bear market and he beginning of a new bull market can be tricky, which is why investment pros generally advise long-term investors to hold onto their stocks.
And despite the coronavirus, Wall Street expects markets and the broader economy will rebound later this year.
"By year-end, economic and earnings growth will be accelerating, the Fed funds rate will be at the zero lower bound and the impact of any fiscal stimulus will be flowing through to consumers," Goldman Sachs analysts wrote in a note to clients on Wednesday.
Goldman's prediction for the S&P 500 at year-end? At around 3,200 points — or about 17% higher than Wednesday's closing price.
***
In the current context, many of us are tempted to seek “bargains” to buy. However, I regret to inform that the worst is yet to come.
The current bear market is about to enter into a second, and more difficult, stage. The first leg of this decline was primarily driven by professional selling – professional traders and fund managers selling and unwinding positions. The selling by professional investors is far from done. However, the second leg of the decline will be driven primarily by mass selling on the part of individual investors who will now start to massively and simultaneously liquidate their stock portfolios and fund holdings – from their private accounts and retirement accounts. Both mutual funds and ETFs will be forced to liquidate their portfolios in order to meet redemption and sales.
This is a real crisis – it's not going to be a short-term problem. The coming 12-18 months are going to be very long and difficult times.
[and of course... Never has it been so critically important, as it is right now, to have the right portfolio strategy. Successful Portfolio Strategy will provide you with the knowledge and the tools that you need to put a winning portfolio strategy in place and successfully manage its practical implementation. .... For one month only, we are offering our loyal followers, and early subscribers, a $50 discount off of the yearly subscription price of $399. So be sure to act now. -- James A. Kostohryz]
***
[3/12/20] The escalating coronavirus emergency sent the stock market Thursday into its worst slide since the Black Monday crash of 1987, extending a sell-off that has now wiped out most of Wall Street's big gains since President Donald Trump took office.
The S&P 500 plummeted 9.5 percent, for a total drop of 26.7 percent from its all-time high, set just last month. That puts it way over the 20% threshold for a bear market, officially ending Wall Street's unprecedented bull-market run of nearly 11 years. The Dow Jones Industrial Average sank 2,352 ponts, or 10 percent, its heaviest loss since its nearly 23 percent drop on Oct. 19, 1987.
Stocks fell so fast on Wall Street at the opening bell that they triggered an automatic, 15-minute trading halt for the second time this week. The so-called circuit breakers were first adopted after the 1987 crash, and until this week hadn't been tripped since 1997.
The Dow briefly turned upward and halved its losses at one point in the afternoon after the Federal Reserve announced it would step in to ease "highly unusual disruptions" in the Treasury market. But the burst of momentum quickly faded.
Trump often points proudly to the big run-up on Wall Street under his administration, warning a crowd at a rally last August that "whether you love me or hate, you gotta vote for me," or else your 401(k) will go "down the tubes."
Just last month, the Dow was boasting a nearly 50 percent increase since Trump took the oath of office on Jan. 20, 2017. By Thursday's close, the Dow was clinging to a 6.9 percent gain, though it was still up nearly 16 percent since just before Trump's election in November 2016.
The Dow officially went into a bear market on Wednesday, when it finished the day down more than 20 percent from its all-time high. For the S&P 500, this is the fastest drop since World War II from a record high to a bear market.
The combined health crisis and retreat on Wall Street heightened fears of a recession.
"This is bad. The worst and fastest stock market correction in our career," Chris Rupkey, chief financial economist at MUFG Union, said in a research note overnight. "The economy is doomed to recession if the country stops working and takes the next 30 days off. The stock market knows it.
The fallout mounted Thursday, as the NCAA canceled its men's and women's basketball tournaments, major league baseball postponed opening day, and Disneyland announced it is shutting down. Even Mount Everest closed. Closer to Wall Street, New York's Metropolitan Museum of Art, Carnegie Hall and the Metropolitan Opera shut their doors, and Broadway theaters planned to go dark.
In a somber prime-time address Wednesday night from the White House, Trump announced the new travel ban as well as measures to extend loans, payroll tax cuts and other financial relief to individuals and businesses hurt by the crisis.
But the travel restrictions represented another heavy blow to the already battered airline and travel industries, and the other measures did not impress Wall Street.
In a surprise move, the Fed said it would pump in at least $1.5 trillion to help calm the market and facilitate trading.
After earlier thinking that the virus could remain mostly in China and that any dip in the economy would be followed by a quick rebound, investors are seeing the damage and disruptions mount, with Italy locking itself down, the NBA suspending games and authorities in the U.S. and beyond banning large gatherings and closing schools.
"Anyone who tells you they know how long this is going to last is wrong," said Adam Taback, chief investment officer for Wells Fargo Private Bank. "The uncertainty here is trying to figure out how you get this virus under control, and is that a matter of days, weeks or months."
***
[3/12/20] Wall Street’s staggering skid that began less than three weeks ago has pulled the Dow Jones Industrial Average into what’s known as a bear market.
After a string of sharp losses, the Dow has now fallen more than 20% from its last peak on Feb. 12.
The S&P 500, the index most investors pay attention to, moved within striking distance of its own bear market Wednesday, as did the Nasdaq. Both indexes are in a correction, down at least 10% from their most recent all-time highs.
Here are some common questions asked about bear markets and corrections and what they mean for average investors:
HOW IS A BEAR MARKET DIFFERENT FROM A MARKET CORRECTION?
A correction is Wall Street's term for an index like the S&P 500, the Dow Jones Industrial Average, or even an individual stock, that's fallen 10% or more from a recent high. A bear market occurs when the index or stock falls 20% or more from the peak for a sustained period of time.
Corrections are common during bull markets, and are considered normal and even healthy. They allow markets to remove speculative froth after a big run-up and give investors a chance to buy stocks at lower prices.
The major U.S. stock indexes entered a correction this month amid mounting fears about the impact that the coronavirus outbreak could have on the global economy and company earnings growth. A oil market price war this week that led analysts to lower their profit forecasts for energy companies fueled more selling on Wall Street.
All told, the Dow fell 1,464.94 points Wednesday to 23,553.22. That's 20.3% below its record close of 29,551.42 on Feb. 12. The S&P 500 index slid 140.85 points to 2,741.38. It's now down 19% from its high of 3,386.15 on Feb. 19. The Nasdaq dropped 392.20 points to 7,952.05, or 19% below its peak of 9,817.18 on Feb. 19.
WHAT'S BOTHERING INVESTORS?
The outbreak of the coronavirus that originated in China has quickly grown into a pandemic that is threatening major sectors of the global economy, stoking fear that the U.S. and other economies could be tipped into a recession.
Many companies, including airlines, cruise operators and big consumer technology manufacturers, have warned their earnings will take a hit this year due to the economic fallout from the outbreak.
Investors remain uncertain over whether action taken by the Federal Reserve and the Trump administration to shield the economy will be effective or arrive quickly enough to prevent widespread economic pain.
More recently, a sharp drop in crude oil prices has further dimmed the overall outlook for corporate profits this year and next. Company profits tend to be the biggest driver of stock market gains.
HOW OFTEN DO MARKET CORRECTIONS BECOME BEAR MARKETS?
In the S&P 500, there have been 23 corrections since 1945 and 12 bear markets, not including the current near-bear market, said Sam Stovall, chief investment strategist for CFRA. That works out to corrections becoming bear markets a little less than 35% of the time.
Should the S&P 500 enter a bear market before April 11, it would mark the fastest drop of 20% by the index on record, Stovall said.
WHEN WAS THE LAST TIME WE HAD A BEAR MARKET?
The last bear market for the S&P 500 ran from Oct. 9, 2007 through March 9, 2009. The index fell 56.8%. in that 17-month period as the U.S. housing downturn and mortgage crisis erupted, triggering a credit crunch.
HOW LONG DO BEAR MARKETS LAST AND HOW DEEP DO THEY GO?
On average, bear markets have lasted 14 months in the period since World War II, while market corrections have lasted an average of five months. The S&P 500 index has fallen an average of 33% during bear markets in that time. The biggest decline since 1945 occurred in the 2007-2009 bear market.
History shows that the faster an index enters into a bear market, the shorter they tend to be. Historically, stocks take 270 days to fall into a bear market. When the S&P 500 has fallen 20% at a faster clip, the index has averaged a loss of 26%, Stovall said.
WHAT ARE THE SIGNS THAT A CORRECTION OR A BEAR MARKET HAS ENDED?
Generally, investors look for a 20% gain from a low point as well as sustained gains over at least a six-month period.
On average, bull markets last 4.5 years. In terms of the S&P 500, the current bull market has been going on for almost 11 years.
The shortest bear market for the S&P 500 was in 1990. It lasted almost three months, sliding 20% in that period. The longest was a 61-month bear market that ended in March 1942 and cut the index by 60%.
***
[3/14/20] A look at bull and bear market through history
***
[3/13/20 Profit from the Pros by Kevin Matras] So what now?
Let's look at a few stats. The top 10 worst bear markets (using the Dow) following the Great Depression shows that it declines on average by -39.27%. And it lasts on average of 16.9 months.
The biggest bear market in that study was the last one (10/2007-3/2009) during the housing/financial crisis. It was dubbed the Great Recession and the market plunged by -54.43%. But it's worth noting that our economy and financial system back then were on pretty shaky ground. A starkly different situation compared to now.
But while we're drawing contrasts, we don't yet know how this health scare will compare either.
Nonetheless, the market as of the close of business yesterday was down by -28.26%.
So we're not that far from the average. Although, there's a way to go to the worst case study.
But the rallies that followed have been even bigger. Within a year after a bear market, stocks surge on average of 44.74%. And go on to gain on average 66.34% by year 3.
BTW, following the Great Recession, the market gained 63.40% in year 1; 100.58% by year 3; 153.58% by year 5; and more than 357% during the entire 11+ year bull market.)
Anyway, there could very well be more downside.
But now is the time to start building your list of your dream stocks.
You don't have to go all in at once. But you can start taking nibbles.