Monday’s 7% surge in the Dow Jones Industrial Average and the S&P 500 index, on hopes that cases, hospitalizations, and deaths from novel coronavirus were beginning to plateau, particularly in New York City, brought Wall Street’s bulls out of the woodwork. On Monday JPMorgan said investors would “be able to recover the losses in equities sometime next year,” while Morgan Stanley said the worst was behind us.
Setting aside epidemiology, which is way above this columnist’s pay grade, “bending the curve” of the disease in any one city or state — as Washington and California may have done — does not guarantee businesses will reopen immediately or that companies like, say, Macy’s M, +4.97% , will rehire everyone they laid off. Nor does it protect us against a deep recession that appears to be baked in or the big earnings hits many companies will announce when they report first-quarter results in coming weeks.
And market history tells us that the very deepest bear markets take much longer to return to their previous highs — 7½ years on average. That’s more than twice as long as my MarketWatch colleague Mark Hulbert found it took for all bear markets (defined as a 20% decline from the highs) to recover.
I used Yardeni Research’s bull and bear market-dating system to select all bear markets since 1929 that saw stocks DJIA, -0.11% fall by 33% or more. (The S&P 500 SPX, -0.16% fell 33.9% from its Feb. 19 all-time high through its March 23 closing low. As of Tuesday’s close, it had bounced back 18.95 but was still 21.5% off the highs.) That comprised eight bear markets, including the epic 1929 crash that preceded the Great Depression, in which stocks fell an agonizing 86%.
|Length of||Time to reach|
|Bull market peak||bear market||% decline||previous highs|
|Oct. 9, 2007||17 months||56.8%||6 years|
|March 24, 2000||18 months||49.1%||5 years|
|Aug. 25, 1987||3 months||33.5%||<2 years|
|Jan. 11, 1973||21 months||48.2%||7 years|
|Dec. 2, 1968||18 months||36.1%||<2 years|
|Sept. 5, 1940||24 months||34.5%||5 years|
|March 11, 1937||12 months||54.5%||8 years|
|Sept. 16, 1929*||32 months||86.2%||25 years|
|Source: Yardeni Research|
I calculated based on price alone; collecting and reinvesting dividends allow investors who hang in there to recover their money sooner. I didn’t account for inflation, either.
Those eight mega-bears lasted on average 18 months, posted stock declines of 49.9%, and took 7½ years from the market bottom to reach their all-time highs again.
Even if you assume that 1929 (after which stocks took 25 years to recover their all-time highs) and the 1987 crash (which was driven by a breakdown in trading technology, lasted only three months and wasn’t followed by a recession) were anomalies, the other six megabears still averaged 18 months in length, suffered a 46.5% peak-to-trough decline, and took 5½ years to reach their previous highs again.
So, if history is any guide — and, of course, past performance is no guarantee of future results — we won’t see the S&P 500 near 3,400 again until at least the summer of 2025 and maybe even not until summer 2027.
OK, that’s history. What’s likely now?
This is a really tough one because it combines not only the usual bear-market elements — falling stocks and an economic recession — but also a new virus whose path and extent are difficult enough to measure, let alone predict. Even once the initial outbreak subsides, we may see secondary, even tertiary waves accompanied by partial shutdowns. As Anthony Fauci, the director of the National Institute of Allergy and Infectious Diseases, has told us, we won’t be truly out of the woods until we have proven treatments and an effective vaccine. That, as he’s also pointed out repeatedly, isn’t likely until next year at the earliest.
Which all means the uncertainty about the virus will likely wax and wane over coming months and uncertainty, as we all know, is business’s worst enemy. Consumer confidence has taken a big hit that may get worse. As for business confidence, don’t ask. Even large companies will come out of this much leaner, while many small businesses unfortunately won’t survive. The nonpartisan Congressional Budget Office estimates unemployment will rise sharply and stay at 9% through the end of 2021.
Congress’s massive stimulus packages and the Federal Reserve’s “whatever it takes” approach are a critical reason markets have rallied. But I wonder if all that helicopter money is enough to fill the gigantic crater COVID-19 has blown in the economy. Global supply chain disruptions and huge cash outlays to keep customers and pay workers will damage corporate balance sheets and depress earnings.
So even if there’s reason for optimism about the disease itself, I have no idea whether we’ve seen the bottom in the S&P or will retest the lows, or even fall below them. But there are no miracle cures for the stock market, either. It’s going to be a long slog.
Howard R. Gold is a MarketWatch columnist. Follow him on Twitter @howardrgold.