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By Noah Solomon
Special to the Financial Independence Hub
Against a backdrop of sky-high inflation, rising rates, and growing recession concerns, stocks have had a dismal year, with technology and unprofitable growth companies experiencing particularly severe losses.
Given the carnage in global markets, investors are pondering the following three questions:
- How long will the carnage last?
- How much more will equities fall before hitting bottom?
- What might it take for equity fortunes to turn?
In my commentary below, I address these questions from a historical perspective.
The current Bear Market: Fairly Average by Historical Standards
To begin, I analyzed all peak-tough declines of more than 15% in the S&P 500 Index since 1950, which are listed in the following table:
The average length of all 15%+ declines is 310.9 days. Taking the recent peak on January 3, the current bear market clocks in at 270 days as of the end of September. The time is at hand when the current decline will have become average from a historical standpoint. In terms of magnitude, the average decline has been 28.7%. As is the case with duration, we are near the point at which the current decline in prices can be construed as garden variety, with the S&P 500 Index down 24.3% from its early January peak through September 30.
Although historical averages are a useful guidepost for contextualizing where the current decline in stocks stands, they must nonetheless be taken with a large grain of salt. Of the 17 declines in the S&P 500 index since 1950, 14 have been at least 5% less or 5% more severe than the average decline of -28.7%, and five of them have fallen outside of the +/- 10% band of the average. There is no guarantee that markets will continue to decline until they match the historical average. Similarly, it is entirely possible that the current decline will eventually exceed the historical norm (perhaps meaningfully so).
Every bear market is unique in its own way. They may share certain commonalities but none of them are exactly alike. They differ either in terms of their causes, their macroeconomic environments, or the accompanying fiscal and monetary responses. Accordingly, we further scrutinized the data to ascertain whether there are any factors that can be associated with worse than run of the mill bear markets.
One Hell summons another
We found that past bear market patterns can be well-summarized by the Latin expression “abyssus abyssum invocat,” which means “one hell summons another.” Historically, once stocks have already suffered precipitous declines, they have tended to continue falling over the short term. Of the eight losses that have breached the -25% threshold, the average peak-trough loss was 39.1%. Alternately stated, during times when stocks declined by at least 25%, the panic train went into high gear, with stocks declining a further 14.1% on average.
Beware the “R” Word
Bear markets that have been accompanied by recessions have tended to be more vicious than their non-recession counterparts. Of the 17 declines in the S&P 500 Index of at least 15%, nine have been accompanied by recessions. The average length of these nine episodes is 427.8, which clocks in at a full 116 days longer than the average for all 17 observations. Continue Reading…
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