8 November 2022
With the current bear market reaching 300 days, historic data suggests investors need to hold their nerve or miss out on a strong recovery, according to David Henry, investment manager at Quilter Cheviot.
Looking at the previous nine bear markets, where global stock markets decline by 20% from the most recent high, the sell-off lasted on average 315 days. The current bear market is the longest since the Financial Crisis 2007-09.
Henry believes that due to the widespread adoption of computerised trading, rapid proliferation of information and more interventionist central banks, market moves today come and go more quickly than previously declines. As such, Henry believes now could be a good entry point for investors.
“The current environment has provided a different challenge than the modern investor has become accustomed to, one that requires a bit more endurance. The data suggests that we could be nearing the end of this particular bear market, but of course the process can go on for longer.
“Some would say that such an environment has created a generation of investors who are too quick to “buy the dip”. I say that this is not necessarily a bad thing. Individual circumstances vary, but, more often than not, that is exactly the right thing to do - even if you are a little early. I would even go as far as to say that a small dose of naivety can be helpful at times - better to be proactively putting cash to work than constantly waiting for the next monster to emerge from under the bed. At some stage they stop appearing.”
While there will be no signal that we have hit the bottom of the market, the data does show that when the trough has been reached, markets tend to bounce back hard. On average, the performance on the day following the market bottom was 3.2%, with one month returns at 14.2%- and six-month figures standing at 30.4%.
|
Bear market date |
% Price Decline |
Length (days) |
Performance on day post market bottom |
1 month return post bottom |
6 month return post bottom |
|
17/01/73 - 02/10/74 |
-44.5% |
623 |
2.2% |
8.7% |
29.8% |
|
20/11/80 - 12/08/82 |
-28.2% |
630 |
1.2% |
13.4% |
43.6% |
|
27/08/87 - 26/10/87 |
-23.7% |
60 |
1.9% |
6.7% |
21.4% |
|
20/07/98 - 5/10/98 |
-20.5% |
77 |
1.4% |
18.0% |
32.6% |
|
27/03/00 - 21/09/01 |
-40.9% |
543 |
3.8% |
10.8% |
17.9% |
|
19/03/02 - 09/10/02 |
-31.3% |
204 |
2.5% |
13.7% |
9.7% |
|
12/10/07 - 06/03/09 |
-58.4% |
511 |
5.3% |
21.7% |
54.2% |
|
02/05/11 - 04/10/11 |
-22.6% |
155 |
2.0% |
12.0% |
20.2% |
|
19/02/20 - 23/03/20 |
-33.9% |
33 |
8.8% |
23.2% |
43.9% |
|
Average |
-33.8% |
315 |
3.2% |
14.2% |
30.4% |
Market performance is MSCI World in USD terms. The bear market of 1968-1970 has been omitted as data is unavailable for the MSCI World index prior to 1970.
Source: MSCI
Henry added: “When markets go down a lot, volatility (the amount that the market moves around day to day) tends to spike. This means that when we do eventually reach the bottom, the elastic band tends to snap back quite hard and returns in the early stages of recovery have been high.
“You have to still be in the game by that stage to benefit of course and this is why time in the market is so important. Trying to time the bottom is a fool’s game and likely to mean you miss out on the best short-term returns. These returns tend to occur during periods of maximum pain, but no one said this investing malarky was easy.”
Looking at what will cause markets to bounce back, Henry continues to believe that the path for inflation is the number one question right now, but any number of events could provide a spark.
“If or when inflation shows signs of abating could be the cue for markets to stage a recovery,” Henry said. “Maybe central banks will ease up on the hawkish rhetoric. Or company earnings this time around will prove to be better than expected. Who knows what the catalyst will be, or if we even need one? The point is, we won’t necessarily need good news for markets to turn – just better than expected. Investors need to make sure they are in the game to reap the rewards.”
