Jubliation has replaced fear, and the consensus is now that the second-worst bear market in US history ended on March 9th and it’s all champagne and roses from here.
In the meantime, let’s review what happened after the two other biggest bear market bottoms of the past century, 1932 and 1974 (see Prof Shiller’s chart above). In both cases, as now, the market had a sharp rally off the lows.
In real terms (after adjusting for inflation), the 1932 market almost doubled in a year. The 1974 market, meanwhile, jumped about 35% over two years.
But it’s what happened after that that matters now.
After doubling off the low, the 1930s bear market pushed another 50% higher over the next three years to 1937 (not bad!). But it then got cut in half again, and it remained below the 1937 peak for 15 years. In 1949, 17 years after the 1932 bear-market low, when the next secular bull market finally began again, the market was 50% below the 1937 rebound peak and about 70% below the 1929 bull-market peak.
In 1974, the market rebounded 35% in a couple of years. In 1982, however, eight years later, when the actual bull market began, it was back below the 1974 low. The 1973 peak, of course, was lower than the 1966 high, so the bear market that ended in 1982 was actually 16 years long.
That’s why they call them “secular” bear markets.
So even if March 9th was the bottom of a Great Bear Market that took stocks down 60%+ in 9 years from the 2000 peak (in real terms), let us not celebrate too much about what is likely coming next. As Jeremy Grantham has said, the great bear markets don’t hurry, and this one probably has a long way to run.
Here’s Merrill strategist David Rosenberg on this topic. Rosenberg, by the way, thinks the bear-market rally has now run its course and we’re going to quickly retest the March lows:
At this time, we believe it is necessary to provide clients with some historical
perspective from the last colossal credit collapse in the 1930s, understanding that
there were similarities as well as differences. It was extremely difficult for equity
investors to make money in the decade following the June 1932 bottom. After the
three-month rally (+75%) off the bottom in 1932, equity markets were extremely
volatile and largely sideways for the next nine years. Keep in mind that the jury is
still out as to whether the March 2009 lows were in fact the bottom, as was the
case in 1932.
If March 9 was the low, what does it mean for the outlook?
It doesn’t say much, actually. The same goes for corporate spreads. The S&P
500 bottomed in mid-1932 and soared nearly 75% in the next three months.
Anyone who bought at that point and hung on to their position saw no capital
appreciation for nine years. Baa spreads also hit their widest levels at 724 basis
points in mid-1932, a year later they were down to 380 basis points. While the
initial the surge in the stock market and the tightening in corporate spreads from
stratospheric levels presaged the bottom in GDP in the third quarter of 1932, the
reality is that the Great Depression did not end until 1941 (and the next secular
bull market did not commence until 1954). The prior peak in GDP was not
reattained until the end of the 1930s, fully seven years after the introduction of the
New Deal stimulus. By then the unemployment rate was still at 15%, consumer
prices were deflating at a 2% annual rate and government bond yields were on
their way to sub-2% levels.
Our preference is to stick with fixed-income securities
Be careful about jumping into the stock market with both feet after this monumental rally. Consider whether or not it would be more appropriate to take advantage of the run-up to reduce equity exposure. Our preference is to stick with fixed-income securities, which we believe will work much better from a total return standpoint, as they did for years after the economy hit bottom back in the early 1930s. When we are finally coming out of this epic credit collapse and asset deflation, we should expect that the trauma exerted on household balance sheets will have triggered a long wave of attitudinal shifts toward consumer discretionary spending, homeownership and credit. The markets have a long way to go in terms of discounting that prospect.