Bear Vs. Bull: The Showdown
Buster Douglas.
A name that is not known to many now, a name not known to many then, but for a moment in time, the entire world knew his name.
The night was on February 11, 1990. Buster Douglas was going up against someone that everyone knew. Mike Tyson.
Tyson was then undefeated — the undisputed heavyweight champion of the world. Going into the match, Tyson was a 42 to 1 favourite. Buster Douglas was the bottom of bottoms. No one gave him a shadow of a chance.
But that night, the unthinkable happened. The name Buster Douglas was on everyone’s tongues as he knocked out the reigning champion of the world, against all odds.
Today, some investors might be making the same mistake of following the same logical “odds”, believing what investment professionals and financial media are saying; that the economy and the markets are headed for more pain.
But what does the data say?
Using US markets (S&P 500) as an example, it entered bear market territory on 13 June 2022 after falling more than 20%.
Looking at all the bear markets since 1946, the data shows that on average it takes 85 days to reach the bottom after entering a bear market (shown in the chart below)
Data from : Bloomberg
57% of the time, or more than half the time, it took 46 days or less to bottom.
42% of the time, or 2 out of every 5 instances, the bear market was over within a month.
Data from: Ned Davis Research and Bloomberg
It has been over 2 months since markets in general entered bear market territory. Historically, this would suggest we are quite near to the bottom.
Longer bear markets have tended to coincide with recessions, however even recessionary periods had bear markets that bottom out as short as 1 day.
If you are worried about a recession and worried about what it might mean for your portfolio, you may be surprised to know that recessions do not predict stock market returns.
Forward Returns From Bear Market Bottoms
There have been 6 bear markets since 1987 and if you were invested in a globally diversified portfolio (represented by the MSCI World Index) near the bottom of the market, you would experience the following results (see chart below):
Data from: Bloomberg
Market returns from the bottom are very positive, yielding a 21% return over a 1 year period. Returns are 100% positive for the last 6 bear markets when investing at or near the bottom for the next 3 years and 5 years.
Based on data from past bear markets, once the market is down 20% the bottom is not far away. Armed with the knowledge that forward returns from bottoms have been extremely strong, we should embrace bear markets instead of fearing them.
The Caveat
However, nobody is able to time the bottom perfectly — but keeping in mind some broad points, such as forward returns after -10% and -20% events and having a game plan ready when these sell-offs inevitably happen, will set you up for a good investment outcome.
Whilst we do not have a crystal ball that can tell us when to perfectly buy into the market bottom, we can feel comfortable that we will be rewarded when investing into bear markets. The market will reward you handsomely if you are able to deploy more capital or dry powder during periods of high pessimism and fear.
With markets still down double digits this year, do you feel confident about navigating the uncertainty ahead?
What type of stocks do better in inflationary environments?
Should I wait till economic data is clearer before investing?
How do I maximise returns during a bear market?
Should I sell now and wait till the market bottoms out?
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