Africa-Press – South-Africa. At the beginning of the 20th century the US stock market made up about 15% of international stock markets, based on market cap. At the start of 2022, that number grew to 60%[1]. The UK in turn shrank from 24% to now roughly 4%, Germany from 13% to about 2% and France from roughly 11% to about 3%. The US market is important.
In financial markets the technical term for a bear market is a drop from the recent peak by 20%. A drop by 19.9% doesn’t seem significant, but if you fall by that extra 0.1%, then you are in trouble, apparently.
The S&P500, the most referenced US-based stock market, has since 1928 experienced 26 bear markets. The average decline has been 35.62% with the average length in time being 289 days[2] until the previous peak was reached.
The biggest drop over all these bear markets was a massive 61.81% during the 1931/32 bear market, which lasted 205 days. The last one we experienced, before the one we are currently in, was during the Covid-19 pandemic, being a 33.92% decline, but it lasted a mere 33 days.
This year in June, the S&P500 entered a bear market for the first time since then. As of 30 September, the S&P500 was down 23.9% so far this year.
In the US, the 60/40 portfolio has been a benchmark for a balanced portfolio asset allocation for some time. It refers to allocating an investment portfolio to 60% equities and 40% bonds. Allocating your portfolio according to this ratio since 1928, taking 2022 year to date into account, you would have experienced 21 down years and 74 up years, translating to 22% of years when the portfolio combination would be down and 78% when it would have been up.
It should come as little surprise that we are currently in one of those down years; year to date, the portfolio combination is down roughly 21% in USD (with the caveat that the year is not yet over, and it can get better, or worse). Is this the worst it has ever been? Not quite. In 1931, this combination was down 27.3% for the year. Warren Buffet turned one in 1931.
These are the headlines, but headlines are rarely the long-term reality. What does the trendline say?
The trendline is simply this, before this bear market there has been 26 bear markets, but 27 bull markets.
The trendline is that humans are moving forward. We are increasing productivity. We are finding new, innovative ways of solving problems, and creating some new ones.
The trendline of past wars reveal that war in Ukraine will end (unfortunately there will be another war somewhere at some point), inflation and interest rates will come down again (and then rise again) and markets will enter the next bull market (and then the next bear market).
The average bear market, mentioned above, had an average decline of 35.62%. But the ‘worst’ bear market was a decline of 61.81%. Quite a bit worse.
But beware the narrative of the average
The market rarely delivers the average.
Howard Marks often refers to the tale of the six-foot man who drowned in a river that was five feet deep, on average.
It is not relevant or important to survive on average, you need to survive during the worst of times. If you can do that, you have the ability to take part during the good times – which inevitably will come.
All in all, the line on the proverbial performance chart, over long periods of time, will go from the bottom left to the top right.
Morgan Housal, author of the book Psychology of Money, noted “A lot of financial debates are just people with different time horizons talking over each other.”
The short term is the noisy headline which I implore you to ignore. The long term is the relevant trendline which I implore you to embrace.
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