Beware of the bear
The shortest and most powerful
The fall in the stock market over the past month will go down in history as the shortest but most powerful ever. Certainly, stock markets have fallen more in the past than in recent weeks. However, never before has there been such a sharp fall in prices in such a short period of time. For example, the S&P 500 index only needed 16 trading days to get from its All Time High into an official bear market. A market becomes a bear market as soon as the drop from the highest point is at least 20 percent. The current crash is a lot faster than the infamous fall after the bankruptcy of Lehman Brothers in 2008.
Black Corona Swan
It shows once again the devastating effect on the market of the black corona swan. At the beginning of this year, analysts, investors and economists had counted on everything, but not on an unknown virus that would make the whole world tremble. The more unexpected the event, the greater the shock appears again. After all, you can rely on known facts. Not on total surprises. After such a huge blow, on the one hand there are investors who throw in the towel and prefer to keep it at a low lucrative savings account. On the other hand, there are remarkably many investors eagerly looking for a bottom. After all, history has taught them that there are good returns to be made on the stock market in the years to come.
Last seller first knows where the bottom lies
In this search for the ultimate bottom, however, investors have been warned. The saying goes that the last seller first knows where the bottom is. Some research into similar crashes teaches us that stock market declines tend to follow a similar scenario. The most notorious stock market crashes – 1929, 2000 and 2008 – initially experienced a short but very severe decline. A fall after which the index subsequently ended up in a bear market. It is precisely such a bear market that can often surprise investors unpleasantly.
The most notorious crash
In the most notorious crash ever, that of 1929, the S&P 500 index dropped 45 percent in two months. This was followed by a six-month recovery in which half of this loss was made up. Was it time for a green flag? Not at all, because the index would continue its downward trend to come to a halt only in the spring of 1932, almost 90 percent lower than the 1929 peak!
The Internet bubble of 2000 came to a standstill for the first time one year later – March 2001 – 28 percent lower at that time. A recovery followed, but a terrorist attack in September of that year threw a spanner in the works. A new bottom was set, 37 percent lower. Another recovery followed. However, it was not until October 2002 that a bottom was reached, 50 percent lower than the All Time High of March 2000. After another failed upturn, the stock market would only start its definitive advance towards a new All Time High from March 2003.
In the autumn of 2008, the index took only two months to nearly halve. From the All Time High in October 2007, the index had fallen by 52 percent. But it turned out that there was no definite bottom yet. The index bounced back 24 percent and then dropped to new lows. The infamous bottom was only set in March 2009 with a score of 676 points.
Of course, it is not said that the scenario on the stock market will be identical this time. But the probability seems realistic that the course will be somewhat similar. It can also be explained psychologically. After a first plunge, investors step back in because they can buy shares at significantly lower prices. Much lower than a few months before. Because of the short duration of the fall, the old top prices are still in their heads. After a recovery of a few months, the economic recovery does not yet appear to be going so well. Investors are disappointed to sell their shares again. A new decline sets in. A process that may be repeated several times. Investors are put on the wrong foot every time. That bear is mean.
Until at some point investors have lost all faith in a recovery. The sellers are out of control. So is the bear. Spring arrives – strangely enough this always happens in early spring – and the bull suddenly emerges. It often takes some time then – in the past rally even many years – before investors realise that the market is back on its feet. Those who realise this first realise the best returns.