We’re Definitely in a Bear Market!
It comes as no great surprise that we are in a bear market. How long are we expecting this to last and how will your equity portfolio fair in the long term? What do we know about the history of bear markets? Listen today as Senior Financial Advisors Rob McClelland and Mike Connon discuss some of the shocking data on these market cycles.
Transcription
Rob (00:00):
Hello, this is Rob and Mike from The McClelland Financial Group of Assante Capital Management, and this is Think Smart with TMFG. Today on Think Smart with TMFG, Mike and I are going to be discussing the bear market. Mike, we are in another bear market. Markets are down. Depending on which market you look at, they’re down 20%.
Mike (00:31):
I remember we did that McClelland University many years ago, and we had the bear knocking on the door and clients still remind me of that.
Rob (00:39):
Well, the bear has entered the room.
Mike (00:42):
Yeah.
Rob (00:45):
And no surprise. There’s so much going on and we’ve talked about this in previous podcasts. The war in the Ukraine, that is going to go on who knows for how long. We’re seeing higher interest rates, Canada, the US, and globally. A 40-year high inflation, 40 years. That’s two-thirds of my life. I wasn’t even in this business when inflation was this high. And we’re still seeing COVID supply chain issues because you still got shutdowns happening in different parts of the world and it’s taking a long time for that to fix itself. Everyone thought it would be a five to six-month fix. It’s much longer than that.
Mike (01:32):
So what’s the definition of a bear market, Rob?
Rob (01:35):
A bear market is when a market index drops below 20% from its high. If let’s say the market was at 4,000 and 20% of 4,000 is 800, so if the market dropped down to 3,200 and stayed there for a little bit of time, that’s called a bear market. The market is either in a bull market or it’s in a bear market.
Mike (02:08):
So we have a few. I know that Nasdaq is definitely in a bear market.
Rob (02:11):
The S&P 500, it’s touched into bear market territory during trading on particular days. There’s enough markets that are down. Most people are saying the bear is here.
Mike (02:26):
Yeah. I guess a lot of our clients may not realize it because of our tilt to value in the amount of candy we have in the portfolio. The portfolios are obviously down, but not down anywhere in the sense that would make you think you’re heading toward there.
Rob (02:41):
Definitely. We were looking today. I think our average client is down in that 7% to 8% range. Given that bonds and stocks are down, you would’ve thought that number would be double digits. I was recently away with a couple of other financial advisors and most of their accounts are down more than 10% to 12%. We’re holding up, but no one likes to be down.
Mike (03:09):
No, down is down.
Rob (03:11):
So what do we know, Mike, about bear markets? What are some of the history about bear markets?
Mike (03:18):
Well, we know that downturns don’t last forever. We know that they do always recover. In the last 20 years in the US, we watched downturns range from 3% to 49%, so we’ve seen the range of negative markets we can deal with. Markets have ended up being positive in the last 20 years, 17 the last 20 years, but there’s still going to be that three out of 20 years that they are going to be negative and we know that’s just part of investing. We always talk about risk premium. You get a risk premium for investing in the stock market and that means out of every 20 years, you don’t know how many, but in the last 20, there’s been three negative years.
Rob (03:58):
I think what’s interesting about this, so here we are, the market’s down, we’re nearing the end of the month of May and the market’s down. The evidence shows though that doesn’t mean the market’s going to finish down at year end. On average, as you said, there’s a correction of 3% to 49% in every year, and yet, as you said, 17 of those 20 years, the market ended up being positive. So sometimes, these are just short-term pullbacks. Now I’m not predicting this is a short-term pullback. I think there’s too many factors at play, but you don’t know. We won’t know until we get to the end of the year. If we look at history, we go back, the stock market data can go back to about 1926. We can go back about 94 years and here’s the data. Three quarters of the time or 75%, the market’s positive. The market is negative 25% of the time, so about one in four. So one in four years, you’re going to have a downturn in the market.
Rob (05:09):
Everyone will say, “Well, didn’t we just go through a downturn in 2020?” We did. That was a bear market, but by the end of the year, the market was positive so that really didn’t count as a negative year. The last negative year we had was 2018 and here we are 2022, so four years later. Over time, markets and equities companies do very well. From 1926 to 2021, they earned an average of 10.2%. Those are great numbers. In two-thirds of those years, the market had returns that were either 10% above 10 or 10% below, and 10% below 10 is basically zero. So markets are very volatile and that’s the hardest part about equity investing is living with that volatility. More than two-thirds of the down years were followed by up year. So if you do get a down year, two-thirds of the time, the next year’s going to be an up year. What about 2018? So 2018 is our most recent bear, down year let’s say. Market was down 5%. The next year, 2019, was a great year. Market was up 30%. So all of this says is market volatility is always there.
Mike (06:34):
The thing you get into when you look at numbers, sometimes you look at these years in the past and you forget what happened in those years. I look back and say, 2018. 2018 was a great year in North American markets. Trump in November went to go to war with China on a trade war and the market fell 20% in the last month of the year. The year was going fine. We had some issues in Canada because we were still trying to negotiate through the trade with the US, so the Canadian markets struggled through that year. US markets were very strong. At the end of the year, they took a dive down because of the China situation. Then immediately within the first two months of the next year, they pop right back up and made up all that fall that happened. It looks bad on a chart, but that wasn’t a very painful year, to be honest.
Rob (07:19):
If we end up getting a negative year, should you panic?
Mike (07:24):
Absolutely not.
Rob (07:25):
The data shows that five years later, the market’s going to have come back 50%. In fact, more often than not, one year later, the market’s positive three years later, the market’s positive, and five years later, the market’s positive.
Mike (07:44):
There’s patience that’s required to be in the marketplace. The most important thing in the market is patience. Even as we talk, if we were to go into recession, we wouldn’t even know we’re in recession in 2023. Everyone has a hard time getting that through their mind, but recession is defined as two negative quarters of GDP growth. We’re positive for the first one. We’re probably going to be positive for the second quarter. So even if things went poorly, it wouldn’t be till the third and fourth quarter of 2022 that we’d start to see any negative type of growth and we wouldn’t have find out about that until two months into 2023. The recession is not going to show up anytime soon. We might be in the midst of starting to create it, but it does take some time to see these results.
Rob (08:29):
I did a little research in the bear markets. If you go back to 1926 to the end of 2021 as we talked about that 94-year period, there were 17 years that there were bear markets, where that decline was more than 20% by the end of the year. Those declines range from minus 21% to minus 80%. Now, minus 80% is a whole new level. That was back in the 1920s, but the average decline only lasts for 10 months. Some are longer, but the average only lasts for 10 months. Bull markets on the other hand, so there were 17 bears, 18 bulls over that 94-year period. The bull market ranged from an increase of 21% and believe it or not, an increase of 936% from the end of the bear market. Those are huge.
Rob (09:36):
You don’t want to miss that. That’s where the equity premium is. The bull markets, on average, last 55 months. That’s four and a half years. So you get these bear markets and you’re just setting up for the next bull market.
Mike (09:55):
So out of this, what do we have to remember from all this experience?
Rob (09:59):
I guess for me, volatility, these ups and downs, this is normal. This isn’t different. It isn’t different today. It hasn’t been any different over the last 100 years. Whenever it’s going down, it’s scary. It’s scary for everybody. It’s scary for every individual, every household, every investor.
Mike (10:19):
I guess scary and unexpected are two different things. If you’re watching Friday the 13th, you know it’s going to be scary, but it’s not going to be unexpected. You know it’s going to happen, right? If you’re playing in the markets, you know this stuff is going to come. You don’t know when, but you can’t go and play in these markets and not expect to get scared every now and again.
Rob (10:41):
I always go back. You got to keep that long-term perspective. And what’s long term? You got to be looking out five, 10, 15 years. If you do, you don’t worry about this short-term volatility in the markets. Don’t go look at your statement and look at how many dollars you’re down or what percentage you’re down. It’s irrelevant. I think that the best investors just don’t look at their statements when it’s down, unless there’s opportunities.
Mike (11:08):
And if you have a diversified equity portfolio, we know you do get rewarded. It’s one of the things that always happen. For this volatility, there is some light at the end of the tunnel and there is a reward. That’s the difference between investing in the markets and investing in individual companies. We know individual companies can turn badly and you don’t get that reward. When you own the entire marketplace, there always is a reward at the end.
Rob (11:31):
I was reading today that the ARK ETF that gathered all the attention during the bull market, it had returns one year up 174%. Of course, it’s down 75% to 80% from its highs now, but I heard that lots of investors are throwing their money back into it today. The only problem with that is often, what dropped the most doesn’t do well in the next bull market. You and I saw that back in 2000. During the tech boom, all those companies went down, down, down. It took years for those to recover back to their previous highs. Everyone thinks they’re just going to go back to where they were. It’s often something else that drives the next market bull.
Mike (12:21):
People get very confused on that because we’re value managers, which we buy stocks that have a relatively cheap value to what their earnings are on the street. That’s very different than buying a stock that just fell a lot in price. People tend to get very confused in that because some of these stocks are so overvalued in the beginning. They may have dropped by 50% or 75%, but they’re still overvalued. There’s no earnings there. People get confused on that idea of buying value and buying cheaper, two different things, or buying things that have fallen in price.
Rob (12:56):
So the best opportunity for our clients, for investors is to stick with the plan that you started with. That’s going to allow you to capture the rebound when it comes. I’ve been flying recently and there’s lots of flight delays. I was recently on a flight with a lot of turbulence. Why do you take a plane? Well, it’s going to get you from point A to point B. 99.9% of the time, that plane is going to get you from point A to point B. There’s going to be some turbulence. There’s often going to be delays. You may even get delays when you land because the airport’s too busy, but if you stick with the plan, you’re going to capture the returns. You’ll keep ahead of inflation. It’s pretty good plan.
Mike (13:43):
Yeah.
Rob (13:44):
That brings us to the end of another week. Thank you for joining us. This is Rob and Mike with Think Smart from the McClelland Financial Group of Assante Capital Management, reminding you to live the life that makes you happy.
Assante Capital Management (14:19):
You’ve been listening to The McClelland Financial Group of Assante Capital Management Limited. Assante Capital Management Limited is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Insurance products and services are provided through Assante Estate And Insurance Services Incorporated. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources. However, no warranty can be made as to its accuracy or completeness. Before acting on any of the previous information, please make sure to see a professional advisor for individual financial advice based on your personal circumstances. The opinions expressed are those of the authors and not necessarily those of Assante Capital Management Limited.
