Financial markets have sold off quickly on coronavirus concerns, the related economic fallout and the collapse in oil prices. Investors are trying to discern if the financial markets are in correction mode or if the selling is indicative of a bear market. It is also interesting that all this market volatility comes almost 11 years to the day that US markets marked a bottom during the Great Recession.
We are clearly at a market inflection point. US financial markets are sitting right at the brink of what signals Bear market territory. If the markets cross over for any length of time a recession most likely is unavoidable. Currently, given the events over the weekend and the continued spread of the coronavirus it is looking more like we have a bear market at hand.
So how do you survive a Bear market?
The first order of business is to try and determine when the bear market might end and what will be the severity of the decline. History provides some guidance. There have been 11 bear markets since 1950 and the average bear market lasts for 14 months with the average decline of 25-35%. While the length for this cycle seems too long ,given how quickly the market fell into bear market territory, the average decline does not, we are already down 25% from the peak so another 5-10% decline looks very possible. Small stocks have dropped even more, down nearly 35% as they are more exposed to the challenges facing both the oil sector and small business.
Determining or estimating the economic impact from the coronavirus is difficult and it looks like conditions are dire around the globe at least for the short-term. One other reference point for investors is to look back to the 1918-1919 pandemic or Spanish Flu for clues. That recession lasted just 7 months. Could a similar pattern emerge in the United States for the coronavirus?
The US government passed legislation over the weekend to help small business and help people who cannot afford health care to be tested and pay for their medical care. In addition, by the end of the weekend the Federal Reserve announced they cut short-term interest rates to zero and added $700 billion in liquidity to the banking system. We think it is likely the administration will move quickly to pass other measures to help offset the economic impact of the coronavirus as they continue to recognize the gravity of the situation.
Longer term, the markets will recover, they always do. Many are looking at early May as when the Coronavirus may peak in the United States. If the virus follows a similar pattern as China, the drop from the peak in new cases is significant. Finally, the major economic powers around the world are passing legislation quickly to help small business and industries most impacted by the fallout from the coronavirus survive, namely restaurants, travel and leisure and transportation.
Six months from now, hopefully we look back with admiration and compassion to all those who helped stem the decline and likely we will hear thousands of heart warming stories where neighbor after neighbor looked after his or her fellow human being and doctor after doctor and nurse after nurse did amazing things to help save people’s lives even though they put themselves in harms way.
In the meantime, we expect markets will remain volatile. Eventually we will take advantage of the opportunities Mr. Market is creating. Successful investing requires experience, knowledge, a formal process and a long term approach. Right now is not the time to panic. Right now is a time to wait it out and avoid the temptation to sell with everyone else.
Be safe and keep your loved ones close.
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