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The coronavirus pandemic has had a devastating impact on the United States. Over 100,000 Americans have lost their lives, over 40 million Americans have filed for unemployment, and the economy is at risk of recession. The crisis also ended a historic bull run in the stock markets that lasted for more than a decade.
While the other impacts of the pandemic will take a long time to heal, the stock market has already recovered a significant portion of its losses. The rally lifted the markets in a remarkably short span of time, but the stock market surge is not an unprecedented event.
Past bear markets have seen equity rebounds of similar magnitude, and historic bear market rallies can last for long periods, some up to two years. So is today’s stock rally a bearish rally or are we seeing a full recovery?
What is a bear market? What is a bear market rally?
A bear market is generally defined as a 20% drop in the stock market from an all-time high. A bear market rally is a period during a bear market where stock prices rebound before reversing and returning to new lows.
Bear market rallies are characterized by a sense of hope that the markets will return to their highs, signaling a recovery and potentially a new bull market. These upward spikes can occur over and over again during a bear market. Eventually, we break through, leading to a new bull market.
The S&P 500 has seen its fair share of bear market rallies. Since the crash of 1929, which helped trigger the Great Depression, the S&P 500 (and its predecessor) have seen 14 distinct bear market rallies. The phenomenon has increased in recent years, according to Bloomberg calculations. Since 2000, there have been five bear market rallies.
Here’s the thing about bear market rallies: They are deceptive because they can go on for a long time. Bear market rallies can last for weeks or months before the market moves south again and hits bottom. According to Bloomberg, bear market rallies since the end of 1927 have lasted an average of 627 days before the indices fall and bottom. According to Bloomberg’s count, the longest was 1,616 days and the shortest 133 days.
In the midst of a bearish market rally, it’s easy for investors to get a false impression that the markets are recovering from a sharp eruption. And then they crash again.
Is the stock market in a bear market rally today?
The early stages of the coronavirus crisis had a severe impact on the stock market. Things started to deteriorate in late February, when the pandemic hit U.S. shores, and the sale accelerated in March when national infection rates rose and states began to shut down their economies.
On March 12, the Dow Jones Industrial Average (DJIA) and S&P 500 officially entered bearish territory, with both indices exceeding 25% losses from their all-time highs in February. At the time of writing, we are still in this bear market. The declines ended a historic 11-year bull market, the longest in US history.
Since the end of March, there has been immense volatility in the markets. Shares rose more than 20% as investors cheered on fiscal and monetary policy measures put in place to bring the economy through the pandemic. The least of these has been a shipment of new Federal Reserve lending programs and the $ 2 trillion federal stimulus package. The good news from human coronavirus vaccine trials has also played a role in building confidence.
Experts warn bear market could last longer
The recent stock market rebound might leave you with the impression that the markets have reached flight speed and are heading straight for February highs. But many analysts and traders warn that the gains may be temporary. According to a Bank of America Global Research poll, 68% of global fund managers believe we are seeing a bear market rally, not a recovery.
Todd Lowenstein, Head of Equity Strategy for The Private Bank at Union Bank, believes we are not quite free from the bear market yet.
“There is huge evidence to support this,” Lowenstein said, noting that the overwhelming majority of bear market rallies have retested lows. “History is generally a guide. You want to look at past cycles and see how the markets have performed, how the economy has performed, to get a sense of what’s going on now.
Some experts argue that an increase in day trading due to commission-free trading, stimulus checks and the mere fact that Americans have more free time because they are locked in their homes are contributing to recent stock market returns.
CNBC commentator Jim Cramer recently said that without another federal stimulus package, he feared the market would “spit out soon.” But these same experts warn that these factors are not enough to bring the stock market back to its level of four months ago.
What is driving the bear market rally?
Lowenstein says that until recently a handful of stocks, mostly in the tech industry, pushed rallies forward. This bias causes the stock market to react in a way that does not reflect the real economy, where more than 40 million Americans have filed for unemployment since the start of the pandemic. He notes that consumer sectors, like retail and travel, don’t add much to these gatherings.
“It tells you it’s a narrow rally, it’s not wide,” Lowenstein says. “To see if the market is really sustainable, you want to see broad participation, not what we’ve seen so far.”
Bear market rallies can scare off retail investors. Seeing the stock market crash, many retail investors might be tempted to sell before incurring further losses. Once they see the market soar, they may feel the need to get back into the game, fearing that they may miss out on some profits.
How should you invest in a bear market rally?
Joe Duran, head of personal money management at Goldman Sachs, calls this cycle of emotional reactions to short-term market movements a dangerous approach that investors should strive to avoid.
“Now is not the time to be an emotional investor,” says Duran. “Emotional investors will fear missing out on the rest of what they think is the recovery. But you should never try to salvage bad decisions from the past. You have to let go. “
Instead, Duran tells retail investors to take more time to assess their portfolios and determine how much risk they’re prepared for. Risk profiles should change as individuals age and move closer to their financial goals – they should not change with the whims of the market.
“Don’t try to recover the market that has already recovered, you missed it,” says Duran. “You have to decide how much risk you are willing to take. Think about how you will react and what you will do differently in the future.
The bottom line
Bear market rallies are normal events during low economic times. They are characterized by large rebounds which seem to wipe out losses, but eventually the market hits again. In these volatile economic times, investors should do their best not to be fooled by a false impression of a market recovery and should not change their investment strategies.
“Thinking differently, being against the grain and being patient and having these competitive advantages as a long-term investment horizon are tools in your toolbox for being well positioned in the market for the long term,” says Lowenstein.