The 11-Year Bull Market Has Come To An End, Countdown To The Recovery Has Begun
Stocks closed lower again yesterday, with the S&P and the Nasdaq joining the Dow in bear territory.
The bull market, one of the longest in history, showed no signs of slowing last month. But within 4 short weeks, the coronavirus stopped it in its tracks.
The World Health Organization finally labeled the outbreak a pandemic on Wednesday. Interestingly, previous pandemics did not create such an economic disruption in the global economy. But with trade and supply chains so interconnected, and with the unprecedented containment response from countries and individuals that have impacted the flow of people, goods, and ultimately commerce, the economy has taken a hit.
For perspective, this is the fastest we've ever seen a bull market turn into a bear.
Let me also say that while bear markets typically coincide with recessions, that's not always the case.
And this one might be another example of that.
Recession or not, the pain is real right now.
But it's important to remember that our economy is strong, with 50-year low unemployment, 20-year high in household income, near record high in consumer confidence, and near record lows in interest rates.
It's clear there's going to be a negative economic impact. And nobody yet knows how severe that will be. But the U.S. was arguably in one of its strongest economic positions prior to this, which makes it all the more likely that we will bounce back in record time.
Nonetheless, the longer these disruptions last, the greater the impact will be.
In the meantime, the U.S. government is preparing a package of aid and stimulus measures. But we all know how long that can take as each party bickers with the other.
The Fed, however, swiftly announced further monetary action by injecting $1.5 trillion into our financial system to expand liquidity. This comes on the heels of last week's 50-basis point rate cut. (And traders are still expecting further cuts when the Fed concludes their 2-day FOMC meeting on the 20th.)
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.
And definitely open your mind to new stocks you may never have even heard of before.
Some of the tried and true will continue to be tried and true.
But this virus outbreak, and the upheavals its brought about for businesses, will usher in plenty of exciting opportunities in the inevitable bull market that follows.
So start putting your list together. And keep your eyes and ears open for the new winners you may not even know about yet.
Best,
Kevin Matras
Executive Vice President, Zacks Investment Research
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