Is This a 2020 Bear Market?
Last week the well diversified US stock index, known as the S&P 500, entered what is known as a Bear Market.
A bear market is generally defined as a drop in the index value by more than 20% from it’s previous high. Bear markets are not fun, and they don’t happen very often. Our associates at Nasdaq Dorsey Wright (NDW) informed us that there have been 26 prior bear markets in the United States since 1927. One sees a bear market on average every 1320 days with the average high to low for the S&P 500 being -35.42% in the instances examined. It takes the index an average of 285 days to go from high to low. The last bear market was in 2020 and it took the S&P 500 just 33 days to go from high to low with a 34% drop. Although it was an average decline, it was also the shortest peak to trough on record.
With the movement last week, it has been over 5 months since the top and we are just now entering bear territory. Although we do not know what the amount of the decline will ultimately be, we do believe it is prudent to recognize the risk environment that we are in.
Toronto’s TSX has yet to go into bear market territory due to the previous contribution from energy stocks. It may be worth watching how this continues. With the recession word in the air, it would be very unlikely for Canada not to be affected if the US goes into a recession.
There are many forces driving the declines and not experiencing an official bear market during the 2010-2019 decade could be one of them. Another one is the sudden rise in interest rates due to the extraordinary inflation we continue to experience.
Although we do not know where the markets are going in the future, we continue to watch price movement and our NDW indicators to follow the trend. Our 2 primary indicators which we have highlighted many times in the past continue to provide a good source of where risk is at in the US stock market. Currently both indicators are well below the 50% demarcation point and pointed lower. The positioning of the indicators can create some very good buying opportunities. However, like many things in life, we do believe that patience can be rewarded when it comes to investing and one does not need to be early when seeking out new opportunities as they present themselves.
Due to the significant move up in interest rates, it has been difficult to find a good place to invest except for cash and energy stocks primarily. Cash has now gone to #2 in the NDW Dynamic Asset Allocation platform. Earlier in the year it was in the 5th position of a possible 6 asset classes. This move up in cash prominence is also something we see infrequently and it is a time to take notice. Commodities like oil went to #1 in this model in January. We will be watching closely to see if it remains there along with the movement of Toronto’s TSX.
We currently view this bear market as more of a valuation reset for the market rather than a financial crisis like 2008. However, if we do go into a recession, then the average bear market drawdown could be exceeded. It may be prudent to watch the price action of the Canadian banks to see if there is an opportunity going forward regarding the market going on sale. However, we do believe that patience should be respected at this time.
Please call or email me any questions.
Mike Farrell CFP, CIM
Investment Advisor - Manulife Wealth Inc.
Point & Figure Charts and stock market data provided by Nasdaq Dorsey Wright