Recently, I gave a webinar in collaboration with ShareInvestor and we had a great turnout. I wanted to share some of my thoughts shared during the webinar here, as I do believe it would be beneficial to all investors.
I understand that quite a number of heavyweights in the investment world have come out sharing their thoughts on the markets and how expensive they are looking now.
Warren Buffett: Wow! Buffett Sold 19 Stocks in the First Quarter
In today’s article, I wanted to share on some of the worst case scenarios that could happen and has happened before. Furthermore, given all the bear markets history seen in recorded history, what are the 3 types of bear markets?
US Bear Markets
As can be seen above, these are some of the major bear markets seen in US history. Some would stand out more to us Singaporeans such as the Great Depression, which happened after the roaring twenties where markets declined close to 90%. Furthermore, it took the US market 2 decades to recover back to its original highs.
There was the Dot-com Bubble Burst in the 2000s, where markets corrected 50% and something that is in more recent history would be in 2007, the Global Financial Crisis otherwise known as the Sub-Prime Mortgage Crisis where markets fell almost 60%.
Fast forward to today, the COVID-19 Pandemic. The S&P500 Index at one point fell by 30%, while I understand that markets have rallied quite substantially since then, I do think that we are not entirely out of the woods yet.
However, in terms of worst case scenarios, I do think that a decline like in the 2000s or 2007s would be something we could expect in terms of worst case scenarios.
3 Types of Bear Markets
However, if we were to have to categorise all the different types of bear markets that have happened before, what would it look like? What are some of the characteristics of each type of bear market in terms of the % decline, duration of crisis and speed of recovery?
Studies have shown that in recorded history, there are 3 types of bear markets – Structural, Cyclical and Event-Driven Bear Markets.
Structural Bear Markets tend to be associated with banking crises, where there are structural imbalances or financial bubbles. The best example of such a bear market would be the Global Financial Crisis.
Cyclical Bear Markets tend to occur at the end of a business cycle, where there are high inflation rates, rising interest rates and falling corporate profits. This would eventually spark off a cyclical downturn.
Lastly, it would be Event-Driven Bear Markets, which is something like what we are in now. They are bear markets triggered by one-off shocks, such as wars, virus pandemics (SARS, COVID-19), oil shocks (2015, 2020) or even 9/11.
Looking at the above chart, it shows the characteristics of each type of bear markets as described above.
The good news is that an Event-Driven Bear Market on average, declines the least, last the shortest and recovers the fastest. After all, after the one-off shock shows signs of clearing up, markets would start to recover.
It can be quite daunting when famous investors are being bearish, especially for someone like Warren Buffett selling down quite a number of his holdings. However, I do believe that there is still hope and in Asia, there are many companies with strong financials, fortress-like balance sheets, traded at cheap valuations. If you are adopting a long-term horizon of 3 to 5 years or more, I do believe that the best time to be investing would’ve been yesterday!