The bull run in US stocks ended in pretty gory fashion this month. But how long this bear market lasts will depend largely on what kind of economic shock the coronavirus proves to be — and what other financial vulnerabilities it uncovers or exacerbates.
The S&P 500 is now almost 30 per cent below its peak, leaving analysts and investors wondering whether this is now an opportunity to dive back into the equity market, or whether there is more pain to come.
Goldman Sachs’s chief global equity strategist Peter Oppenheimer has tallied 27 bear markets since the 1800s. He found that the average decline is 38 per cent, and that it has on average taken 60 months for US equities to return to their previous peak. However, the dispersion between different types of bear markets is significant.
“Structural” bear markets, which are triggered by deep-seated economic imbalances and financial bubbles unwinding, have on average meant a 57 per cent slump, and taken 111 months to return to their previous peak.
The more garden-variety “cyclical” bear markets, where rising interest rates damp economic activity and depress corporate profits, have typically led to a 31 per cent peak-to-trough drop for the US stock market, and it has on average taken 50 months to recover.
Meanwhile, “event-driven” bear markets are those triggered by some kind of one-off shock, such as a war, spiking oil prices, an emerging-markets crisis or a brief financial calamity like the Black Monday crash. This seems to fit the coronavirus scenario best, Mr Oppenheimer argues. Such bear markets on average lead to a more modest 29 per cent decline, and last just 15 months.
Nonetheless, Mr Oppenheimer stresses that there are reasons to think that the current market may be more painful than the typical event-driven bears of the past.
A global pandemic is a novel danger with no modern precedents, and interest rates are already extremely low across most of the global economy, which means that central banks have less firepower available to mitigate the impact, he said. This bear market could therefore morph into something far more pernicious and persistent.