On the heels of the market plunge of late February and most of March, investors did a sharp about-face in April, bidding up shares at one of the fastest rates in recent history. Although this recovery probably provided at least temporary comfort from the plunge, it would be unreasonable to view the rebound as a sign that things are all better. They are not.
For one thing, we are now in the midst of earnings reason, when companies report their quarterly results. Some may have good news for the March quarter, but as we move through the current calendar quarter, only a few will be able to show continuing improvement. Against the broad backdrop of U.S. business history, the months just ahead will almost certainly prove to be among the worst, from the standpoint of year-to-year comparison.
With more than 30 million people filing claims for unemployment insurance, it would be difficult to expect anything other than bad economic news. Who knows how many of these folks will go back to work? How long will it be before they are working again? What about the people who will remain unemployed?
When a substantial number of companies go out of business, the related jobs are gone. Yet we have just witnessed a big market bounce, which seemed oblivious to the seriousness of the current problem.
To put this in perspective, let's take a look at what took place during other epidemics over the last 50 years. I know this one's different, but it's a starting point.
Arguably, the worst of these was HIV/AIDS, which emerged in 1981. This was followed by SARS, Avian Flu, Dengue Fever, Swine Flu, MERS, Ebola, and Measles, among others. Each was serious, but in terms of the economic impact none were comparable to what we are facing now.
More helpful information is provided by the history of bull and bear markets since 1926, the inception date for the Standard & Poor's 500 Index. A bull market is measured from the lowest point reached after the market has fallen 20% or more to the next market high. A bear market is under way when the market closes at least 20% down from its previous highest close to the lowest close after it has fallen 20% or more.
Over the last 94 years, there have been 12 bull and bear markets. The average bull market lasted 6.6 years with an average cumulative total return of 339%. The average bear market lasted 1.3 years with an average cumulative loss of 36%.
From the end of 2019 to last March 23rd, the market dropped 31%. From March 23rd to the end of April, the market rebounded 30%, but remained about 10% down for the year to date.
Hmmm. A bear market drop of 31% in less than three months? That matches the shortest prior bear market, which took place in 1987.
And a recovery of 30% in just over five weeks? Much too quick.
Yes, bear markets are generally short. Since the early 1940s, they ranged from a few months to just over two years. Bull markets last longer; half ran from five to 15 years.
Gains during bull markets have been many times the magnitude of losses sustained during bear markets, as one might expect considering how long they last.
So where are we now? Sad to say, we are in the dark. Although there has been much media buzz about treatments and vaccines, there is a wide gap between media buzz and reality. One example is Remdesivir, which was a game changer one week and a nonevent the next week.
And several weeks back, there was a furor over ventilators. The furor passed when it turned out that there were enough ventilators available. Even so, 80% of those who had to be placed on ventilators did not survive.
Bottom line: There is no magic bullet now and none likely for quite a while. Some states may be relaxing their shutdown rules, but that apparent flexibility flies in the face of reality.
No one knows when this bug will be eradicated, treated or prevented successfully. But until there is solid progress, it will be counterproductive to pretend the situation is back to normal.
Despite all of this disheartening news, there is good reason for optimism. Why? Because 90% of the value investors place on stocks today is based on their perception of what will take place more than a year in advance. It would not be a stretch to expect that by May, 2021 we will have what's needed to get back to a more normal way of living. And that may well be what has given the market its recent lift.
N. Russell Wayne, CFP