The bull market that started on March 9, 2009 has finally come to an end.
It lasted 4,020 days, the longest in history, and an entire decade passed by without a bear market.
The question now is what happens next?
Now that investors have their first taste of a bear market in a very long time, do we quickly correct course and start trending higher?
Or are we in store for more bumps and bruises over the next few months?
According to Goldman Sachs, not all bear markets are equal.
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The way we arrived at the bear market affects how long and how bad it will be.
They’ve determined that there are three distinct categories of bear markets, each with a different trigger and characteristics.
An event-driven bear market is defined as being caused by a one-off event like war or an oil price collapse that isn’t followed by a recession.
The other two ways to define a bear market are structural or cyclical.
A structural bear market is triggered by structural imbalances and financial bubbles, like the housing crisis in 2008-09.
A cyclical bear market is one that is caused by rising interest rates, recessions and a drop in corporate profits.
This bear market is considered event-driven at least for now, with the “one-off” being the coronavirus outbreak (you could point to the oil price collapse, but that itself was likely caused by the drop in oil demand due to the coronavirus).
The good news is that of the three categories, event-driven bear markets are the least bad.
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Peter Oppenheimer, Goldman’s chief global equity strategist, says “event-driven” bear markets drop 29% on average. That’s compared to a 57% average drop for structural bear markets and 31% average declines during cyclical bear markets.
And in terms of duration, event-driven bear markets are also the shortest, lasting just 9 months on average. Structural bear markets last 42 months on average and cyclical bear markets last 27 months.
However, Oppenheimer also warns that this event-driven bear market could easily tip over into a cyclical bear market.
We’ve never had an event-driven bear market due to a virus or disease outbreak. Typically during an event-driven bear market, cutting interest rates has been an effective tool to jump start the economy. But in today’s instance, rates are already low, and low rates can’t really spur consumers to get out and spend money if they are encouraged or required to stay home.
And, as mentioned above, interest rates are already low, so a monetary response to the bear market – lowering interest rates – has less of an impact.
Perhaps the most worrisome is that the two indicators of a cyclical bear market, falling corporate profits and a recession, have more than likely been triggered, although not formally acknowledged.
Corporate profits are dropping and have been for quite some time. And yesterday economist Alan Blinder said the US is probably in a recession already.
“I wouldn’t be one bit surprised if when we look back at the data, it is decided … that the recession started in March. We won’t know that. It takes months to get the data that would be relevant to a call like that. But it wouldn’t be a bit surprising to me.”
In other words, investors should proceed with extreme caution and prepare for the possibility of a prolonged downturn.