When the bears depart, the bulls move fast!
A bear market is one in which security prices fall across a broad spectrum of sectors and stocks. This creates negative market sentiment which in turn results in more pessimism and further selling off. This self sustaining characteristic of bear markets is what differentiates them from a market correction. In practice, trying to distinguish between the onset of a bear market and a correction is no easy task. There is no textbook definition of a bear market, but it is generally agreed that a 20% fall in a broad market index such as the “FTSE / JSE All Share” index over at least two months is considered a bear market.
By this definition, SA has experienced 8 bear markets since 1960. These events have lasted from 4 to 29 months, losing between -22% and -62% in value. The enigmatic nature of bear markets makes it difficult to predict their extent or duration. But dissecting the numbers has shown that in most instances, recovery from a market low is followed by an equally dramatic recovery, with markets making impressive gains within as little as 3 months following the low point.
Europe has experienced 5 bear markets since 1973. These drawdowns have lasted between 2 months and 3 years, with declines of between -22% to almost -50%. The 3 month performances after the market lows ranged from between 7% and 40%, averaging 15%. In most instances these positive trajectories continued for another 3 months.
Since 1960, the US has experienced 5 bear markets lasting from 3 months to more than 2 years. Declines during these times have been between -22% to just more than -46%. Once again the positive trend which followed the bear markets was impressive, with positive post-bear 3 month performances ranging from between 8% and 25%. The average 3 month post trough performance averaged about 12.5%. As at 28 November, the S&P 500 has fallen over 43% from its previous high. The US is in a deep bear market.
SA has experienced 8 bear markets since 1960. These have lasted from between 4 months and 29 months declining between -22% and -62%. As in the case of the US and Europe, recoveries have been impressive, with positive moves 3 months after the market low ranging from between +6% and +52%. The average 3 monthly performance after the trough averaged 25%. Currently the All Share index is down 35% since May 2008.
Although history does provide us with some comfort, there is no denying that the markets are tricky at the moment and we may see further downside. No-one has yet been able to quantify the extent of the fallout from the credit crisis. Global inflation seems to still have some way to go before it stabilises and the US consumer is faltering. There is no clear direction in the markets and shares bought for sound investment reasons are penalised by fear for the smallest reasons. But this is where patience and resilience are required. The evidence shows us that on average over 12 months severe over selling in markets is reversed. There are plenty of worthwhile stock opportunities out there for the discerning stock picker, but they may take a little longer than normal to realise value. You need to remember that investing in the stock market is a volatile business - but patience during the most volatile times pays handsome dividends in the long run.
