HCR Wealth Advisors on the Lessons Learned From Previous Bear Markets


A question people often ask is whether we are in a bear market or not. Currently, taking into consideration the standard definition of what qualifies as a bear market, namely one of the major indexes being down 20%, the answer is yes. However, this is more of a popular definition than a standard one according to HCR Wealth Advisors CIO, Jordan Kahn.

Kahn believes a truer definition for a bear market is one that takes into consideration a persistent decline in the general level of asset prices and economic activity. By that definition – despite the fact that not enough data is out yet– we are most likely still in a bear market. However, rather than just labeling this environment as a bear market, HCR Wealth Advisors went back and studied historical bear markets to try to get a sense of the average magnitude and duration as a reference. The firm also looked at when investors began to be active in investing again.

A study conducted by Hedgeye Research went back 100 years and demonstrated that the average bear market lasted for about 20 months. This analysis also included the period of the Great Depression, so if that is excluded that from the analysis and only focused on the post-war period, the average bear market was about 12 to 18 months. Furthermore, the study found that the average peak to trough drawdown in the S&P 500 was about 39%. What we can begin to understand from those two assessments of the study is that in terms of duration, the economy is still in the early stages of what the average duration of a bear market is. And when it comes to the magnitude, it is possible that we have already seen the worst of its decline.

Looking back at some of the past bear markets and the behavior of the indexes during those periods, there are some trends that are indicative of the true bear market definition. Kahn thinks that this is helpful for investors to get a sense of how long these things last and what the general patterns are and how they usually play out. HCR Wealth Advisors also looked at the last five decades and tried to find examples of markets that experienced large declines and how long it took them to bottom. What was found was that the 1973-1974 bear market, for example, correlated with the OPEC oil embargo, and that period also included a recession, the Watergate scandal and its associated hearings, which ultimately led to Nixon resigning.

The markets peaked at the end of 1972, and there was a first downward wave in the fall of 1973. They were then marked by a markedly sharp rally and then came back down, marking new lows that lasted for about 5 or 6 months. Things then broke down even further and ultimately bottomed-out around late September of 1973. In 1974, there was a little bounce back and then another retest of the low.

Another example HCR looked at was the bear market of 1987, which many investors remember as the year of the crash. Looking back on this year, there are some trends that stick out as predictors of things that were come. There was an initial bottom and then a bounce and a retest of the low point about two and a half months after that when a new bull market started. Markets were starting to weaken again in the fall of 1987 and in October, markets had a big crash and bottomed out about a week later. The market experienced almost a 20% relief rally but things petered out from there and the market stalled. By December, markets retraced those gains and tested the lows from early October.

A more recent example of a bear market that might be a bit fresher on everyone’s mind is the bear market of 2001. Investors remember the beginning of that year as being marred by the popping of the tech bubble. Markets were slowly starting to weaken in the summer as the economy slowed down, and things were starting to get priced in. In the fall of that year, the slowdown began to accelerate and then 9/11 occurred. Even though markets reopened after 9/11, they continued to experience a very sharp decline and bottomed a couple of weeks later. From there, the markets went on and had an approximately 24% – 25% relief rally that could not get much further than that. That was high point for the market for 2001.

In 2002 the markets continued to chop around, and by the summer of that year they started to weaken again. In fact, they broke down below the lows from 2001 and had another big sharp drawdown in the summer of 2002. This was followed by a 24% relief rally, a downturn and then retested those lows again. In terms of duration, there was a period of about three months between the July lows to October. After the October lows, there was another 24% relief rally, but again, the markets didn’t make much headway and continued to bounce around.

And finally, the last and most recent bear market is that from the year 2008. Bear Stearns first went under in the spring of 2008 and that started a wave of financial distress that rippled through the industry. Markets actually bounced back pretty well after that, but by the summer of that year, things started weakening again. That is when Washington Mutual went under, Fannie Mae and Freddie Mac had to be nationalized, and the crown jewel of them all, Lehman Brothers, declared bankruptcy. The markets fell precipitously throughout the course of those events and finally bottomed out in the fall when Congress passed the TARP bill. The TARP bill led to a 20% relief rally, which then allowed to the markets to come back down and set a lower low in November. This new low was followed by an another relief rally of 27%, but that too could not hold and the markets again fell to the ultimate low of March of 2009. After that eventual low, the markets began to rebound and saw the beginnings of a new bull market set in place.

Looking at how those historical bear markets compare to today’s market, HCR Wealth Advisors first note that markets started to break down in late February, and this decline really accelerated quickly into March until there was a 35% decline from peak to trough. Since then, there has been about a relatively high 25% relief rally. In terms of the magnitude of the decline, that is consistent with what has been seen in other periods of severe market drops. However, the problem is that it has only been about two and a half weeks since this initial low, and we are likely far from the worst of it, based on historical precedence. In other words, it is really too early to say, in any definitive terms, that what was experienced in March truly was the bottom.

As is evident in all the past examples that HCR Wealth references, selling during these time periods usually occurs in waves. The prudent course of action is really for investors to be patient more than anything else while these things play out. To help clients get through this period, HCR has made a series of defensive moves in client portfolios and investment strategies, such as raising cash, trimming exposure to equities or stocks, and buying more defensive positions for the near future. These moves are designed to manage risks during this period, as well as to minimize the volatility in client accounts. This will help to enable them, and the firm, to get through this volatile period and be intact on the other side of it when the firm starts to dip its toes back in and refocus energy back on growth.

When Kahn looks for a bottom to start to think about growth, a question that is often asked is whether this time is different from others? The answer, of course, is yes. This is obviously a very different time period for several reasons. Our country has never seen this sort of national quarantine where the government mandates that all non-essential businesses shut down. And while this is unique, there are similarities to latch onto from the past. For example, just as no one has seen this kind of economic standstill we are seeing today, in 1973 nobody had seen an oil embargo that threatened to shut down our then mostly manufacture based economy.

In 1987, nobody had seen a crash that resulted in a 22% decline in one day. Before September of 2001, nobody had seen a terrorist attack on US soil threaten to permanently disrupt the way that Americans lived their lives. The background and the events of the times are always different. What tends to be similar, however, is that the emotional patterns of investors are fairly repeatable. This is called the fear and greed cycle. What happens during bull markets is investors’ optimism and excitement continues to grow the longer the bull markets persist. This usually culminates in a period of euphoria that often coincides just around the time that a bull market peaks.

And once the market starts to decline, investors start going through a different set of emotions. The first is typically denial which then morphs into fear and eventually, panic. Today, this goes back to the declines that occurred in March, and at the panic liquidation that spread across all asset classes. It was not just stocks that were selling off hard, bonds and other safe investments were affected as well. There was really a wholesale liquidation and that played a big role in sparking the panic phase. It’s obvious that investors have experienced this, but what has not yet been seen is the final stage called despondency, also sometimes called the “give-up phase.”

It is mostly due to these conditions that persist for an extended period of time that investors lose enthusiasm for the market and ultimately give up. Going back to early 2003 and early 2009, two periods during which things seemed like they were bottoming out and that it was time to start taking some cash and defensive investments and reallocating back to growth, HCR Wealth Advisors received pushback from some clients because it was hard for them to see how things would not continue the downward trend. That is definitely something that the firm continues to be mindful of because HCR Wealth Advisors sees this phase as still to come. Given its client-centered approach, HCR’s top priority is to remain cognizant of the emotional turmoil that investors are pulled through and advise accordingly.

This article is provided for informational purposes only and should not be interpreted as investment advice. HCR Wealth Advisors is not affiliated with this website.

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