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Anatomy of a Bear Market

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By Dan Suzuki, CFA Deputy Chief Investment Officer

The bull market — which lasted almost eleven years and resulted in S&P 500® returns of over 500% — is officially over, having shifted from bull to bear market in a mere 16 trading days. Such a violent sell-off has prompted many to ask whether or not they should be jumping back into the market. First off, nobody knows where the market will bottom. There may be a component of market technicals that determines the ultimate level, but more importantly, the timing of that bottom will be determined by the fundamentals. The table below and chart on the next page should provide some historical context for thinking about bear markets. Here are some key takeaways: 

  • A typical bear market lasts more than a year (particularly those coinciding with economic recessions), wiping out over three years of market returns, which in this case would put the S&P 500® back at December 2016 levels around 2,200-2,300. 
  • Markets do not move in straight lines. Every bear market that has occurred since the 1970s — with the exception of the 1990 bear market, which technically did not actually cross the 20% bear market threshold — has been accompanied by significant rallies on the way down. 
  • Each bear market is unique, but there does seem to be a decent relationship with the starting valuation and the magnitude of the subsequent drawdown. The abnormally high starting valuations this time would suggest nearly 40% downside from the peak (S&P 500® <2,100) vs. the typical 30%. 

This bear market is not just about the coronavirus, which in isolation, should be worth no more than 5-8% of the long-term fair value of the S&P 500®, by our estimates. The pandemic represents a shock to a patient with preexisting conditions (weak growth, tightening liquidity, high valuations and bullish investor sentiment), and which has brought about a second shock of collapsing oil prices. The market is hardly cheap, even after the dramatic sell-off, particularly when you consider that the E (EPS) that represents the denominator of the P/E ratio is likely to fall significantly in the coming months. At RBA, valuation is a secondary consideration to underlying profit trends. We have yet to see the first-order impact to corporate profits and economic data, let alone the second-order effects if this leads to a recession (layoffs, confidence and credit stress). Thus, we find it premature to turn bullish despite the short-term market technicals indicating that it had been oversold. 

Dan Suzuki is registered with Foreside Fund Services, LLC which is not affiliated with Richard Bernstein Advisors LLC or its affiliates. 

Nothing contained herein constitutes tax, legal, insurance or investment advice, or the recommendation of or an offer to sell, or the solicitation of an offer to buy or invest in any investment product, vehicle, service or instrument. Such an offer or solicitation may only be made by delivery to a prospective investor of formal offering materials, including subscription or account documents or forms, which include detailed discussions of the terms of the respective product, vehicle, service or instrument, including the principal risk factors that might impact such a purchase or investment, and which should be reviewed carefully by any such investor before making the decision to invest. RBA information may include statements concerning financial market trends and/or individual stocks, and are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Historic market trends are not reliable indicators of actual future market behavior or future performance of any particular investment which may differ materially, and should not be relied upon as such. The investment strategy and broad themes discussed herein may be unsuitable for investors depending on their specific investment objectives and financial situation. Information contained in the material has been obtained from sources believed to be reliable, but not guaranteed. You should note that the materials are provided “as is” without any express or implied warranties. Past performance is not a guarantee of future results. All investments involve a degree of risk, including the risk of loss. No part of RBA’s materials may be reproduced in any form, or referred to in any other publication, without express written permission from RBA. Links to appearances and articles by Richard Bernstein, whether in the press, on television or otherwise, are provided for informational purposes only and in no way should be considered a recommendation of any particular investment product, vehicle, service or instrument or the rendering of investment advice, which must always be evaluated by a prospective investor in consultation with his or her own financial adviser and in light of his or her own circumstances, including the investor’s investment horizon, appetite for risk, and ability to withstand a potential loss of some or all of an investment’s value. Investing is subject to market risks. Investors acknowledge and accept the potential loss of some or all of an investment’s value. Views represented are subject to change at the sole discretion of Richard Bernstein Advisors LLC. Richard Bernstein Advisors LLC does not undertake to advise you of any changes in the views expressed herein. 

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