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
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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
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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
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