Anatomy of the COVID-19 Bear Market
The current bear market has been driven by the global COVID-19 shock. In this note we compare this bear market to the prior six of the past 40 years.
Magnitude- average at 37%: the six bear markets since 1980 have ranged from 20% to 55% declines, with the average peak to trough decline 36% (Figure 1).
Duration- rapid at just 22 trading days: the average duration of the six bear markets was 239 days, with a range of 37 days (1987 Crash) to 412 days (early-1980s).
Underlying cause- an exogenous shock with some overvaluation: prior cycle causes have included overvaluation, Central Bank tightening, recessions and financial crises.
Multiple indicators of market stress: this rapid bear market has coincided with a surge to GFC highs in the VIX- market fear- index, spike in the US Ted spread and corporate credit spreads, oil price collapse and sharp declines in global growth proxies, suggesting extreme market stress and risk aversion.
The light at the end of the tunnel: once bear markets trough, the average price return in the following year has been 41%, with a range of 28-55%. Of course, if you experience a 50% decline you need a 100% recovery to reach your starting value. That said, the key takeaway is that once the trough is reached, markets generally experience above average returns in the following year.
Market implications: the COVID-19 bear market is the most rapid on record. This speed has contributed to market stress and risk-aversion. We are looking for five factors to drive a recovery- four appear to be in place. Signs of containment of COVID-19 are still needed. If the past is any guide, following the trough the subsequent 1-year returns are strong.