Where do we go from here?
Fear and panic typically cause the market to overreact. As we mentioned before, in market history, this was the quickest move from a market high to down 20% or more. What is very interesting is the time frame that is now in second place, 1929. In the 1920s, an investor only had to put up 10-20% of the money to buy stock, and could borrow the rest. Today is much different.
The market overreaction is what likely will cause this to be looked back on as a great opportunity. And, why we believe selling into this panic situation will create painful opportunity cost within a reasonable amount of time. You would probably agree that emotional decisions often create regret in hindsight.
This is an event-driven bear market. It was only February when the economy was sound, and there were no imbalances. Employment was still strengthening, the housing market was strong, savings rates were high and there were no general imbalances even at the household level. A study by Oppenheimer indicated that during an event-driven bear market, the average loss is about 29%. We are already there. We may not be at the exact market bottom, but many indicators suggest we are likely close. The study also said that the market fully recovers from an event-driven bear market in approximately 15 months.
While the market breached 20% down for the first time since this bull market started, keep in mind that there were three other times when the market was down significantly and subsequently recovered. The market went down 16% in 2010, 19.4% in 2011 and 19.8% in 2018. There have been 11 other bear markets since 1945, and all of them recovered 100% in time. The average time to full recovery was 24 months. As mentioned previously, we believe the recovery this time will be quicker for two reasons; the economy was fundamentally sound when this started, and it is an event-driven bear market created by a transitory event which may shorten the recovery time.
This is why we believe it is in our clients’ best interest to stay the course and not join the panic. Time will heal the economy and the market. It will take patience, but the opportunity cost of getting out of the market now could be as painful as this panic has been scary.
