(Baird’s Investment Strategy Analyst, Ross Mayfield, CFA wrote the following piece in June 2022)
ON BEAR MARKET LENGTH AND HEADFAKE RALLIES
Prior to 2022, the last decade had seen only two ~20% market selloffs: the Covid-19 crash in March 2020 and the Fed-driven selloff of December 2018. Both featured sharp and rapid drops from all-time high to market bottom (33 and 95 days, respectively), with equally quick recoveries. Because of these characteristics, both selloffs are considered “V-shaped.” And because of their recency, it’s easy for the mind to overweight the likelihood that this type of drawdown and bounce back will occur again.
These sort of recoveries also make the market bottom seem obvious in hindsight. The sharp rebounds (and seemingly unrelenting rallies that followed) give a sense that it was obvious in the moment that the low had been made and it was time to pile back into stocks. This is, of course, a fallacy. Timing a market bottom is one of the more difficult things to do in investing, and investors seemingly always doubt the birth of a new bull market until months after it begins (see: 2020)
All of this is to say, selloffs and bear markets don’t always look like 2018 or 2020. For every sharp rebound off the lows, there is a longer and more grinding drawdown. Even outside of major, multi-year crises like 2008 or 2000, bear markets can last longer than one would expect and are often dotted with enticing rallies that only later prove to be head fakes. These can be challenging times to navigate, but this is the reality of being a long-term investor. As we often say, volatility is the price we pay for the market’s long-term gains – but “volatility” can take many shapes.
A common analog for today’s market is the dot-com bubble – a tech-led selloff spurred on in part by the Federal Reserve raising interest rates, accompanied by a fairly minor economic recession (all things considered). There are reasons that this comparison isn’t perfect, but it’s worth revisiting for the nature of the selloff alone. Across the full 2.5 year bear market, there were at least four separate rallies of 10%+, with many more 5%+ rallies spread throughout (see above). This is an extreme example using one of the larger market drawdowns of the past century, but the point that bear markets can take longer than is comfortable stands. As of writing, we are 150 days into the current episode and have already seen multiple rallies of 5%+. More could come.
In the end, expectations are everything. Since WWII, the average market correction has taken 198 days to bottom, and another 328 to reclaim a new high. While 2018 and 2020 may stand out for their recency, bear markets are more commonly measured in months or years, not days. These are just the facts. But these facts shouldn’t keep us from investing, they are merely meant to set expectations as we head forward in a challenging environment. Volatility and selloffs are just a reality to bear for the long- term stock owner. So build a financial plan, play the long-term game, and the day-to-day volatility becomes nothing but noise.
This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.
This report does not provide recipients with information or advice that is sufficient on which to base an investment decision. This report does not take into account the specific investment objectives, financial situation, or need of any particular client and may not be suitable for all types of investors. Recipients should not consider the contents of this report as a single factor in making an investment decision. Additional fundamental and other analyses would be required to make an investment decision about any individual security identified in this report.
For investment advice specific to your situation, or for additional information, please contact your Baird Financial Advisor and/or your tax or legal advisor.
Fixed income yield and equity multiples do not correlate and while they can be used as a general comparison, the investments carry material differences in how they are structured and how they are valued. Both carry unique risks that the other may not.
Past performance is not indicative of future results and diversification does not ensure a profit or protect against loss. All investments carry some level of risk, including loss of principal. An investment cannot be made directly in an index.
Copyright 2022 Robert W. Baird & Co. Incorporated.