Anatomy of a Bear Market

As of the time of this writing (June 13), the market crossed into bear market territory. Major swaths of the market, however, have been in a bear market for several months. A bear market is defined as a 20% decline
from a market high. While no one likes bear markets, they are nonetheless a reality that investors are periodically confronted with. For this month’s Insights, I thought it would be helpful to deconstruct bear
markets by reviewing how long they last, when do they end, and what are some strategies to effectively weather these storms.

How Long Do Bear Markets Last?

Bear markets on average last 289 daysⁱ, meaning a “typical” bear market is about 10 months from peak to trough. For perspective, the current bear market is at 161 days. The truth is that there are few “typical” bear markets as there is considerable variation from bear market to bear market. The shortest bear market was the COVID 19 bear market which was only 33 days from peak to trough. In contrast, the longest bear market was in the early 1970 and lasted 630 days. Each bear market has its own unique triggers and ultimate resolutions. Once a bear market is triggered, forward returns often become quite attractive. On average, twelve months after crossing into bear market territory, markets are on average nearly 15% higher:

Another key question on investor’s minds is how long it takes to recover losses. On average, it takes 19 months for markets to recover from bear markets (to regain high attained in prior bull market):

Note, however, the recent phenomenon in the past 11 years where markets have recovered incredibly quickly. There’s not a clear smoking gun as to why this is the case (possibly very accommodative monetary policy, the “Fed put”) and it’s not clear whether or not the current bear market will follow suit. 

When Do Bear Markets End?

A few months ago we interviewed the founder of multi-billion dollar asset management platform who discussed a checklist of items that we typically see when markets bottom out. The more of the items on this list the better in terms of conviction around a market bottom:
• There will be ‘capitulation’ (ie – panic selling) Look for 90+% down volume days (NYSE hit 91.8% today!)
• There is aggressive put-buying. Look for a VIX over 40 or 50. (yet to see a super-colossal spike)
• At important bottoms, everyone is scared to buy.
• Even high-profile professionals will say “get out of stocks”
• Even the best / biggest companies get sold hard.
• Technical indicators get very extreme – -top or bottom 1% of all-time readings.
• Junk bond yields typically widen.
We can check many of these boxes. We’ve yet to see extreme disorderly selling, but we do see deep pessimism from both individual investors and professionals. There’s huge array of great companies that have been beaten down significantly in price. Look at Microsoft and Nike for example:

Markets tend to overshoot on both the upside and the downside. Markets overshot post COVID and will likely overshoot on the downside as well

What are Some Strategies to Weather This Bear Market?

The answer to this question is very individualized based on one’s risk tolerance, liquidity needs, and tax
situation, but below are some general ideas and concepts to consider:

• This is generally a poor time to make significant portfolio changes provided that the portfolio was properly constructed from the outset. Many of the highest performing market days occur around bear markets and missing just a few banner days can have a big impact on performance:
• If you find your portfolio is giving you an inordinate amount of anxiety some relief selling may be in order. Pivoting 10% of your portfolio for example to more conservative strategies will not do significant long-term damage to your portfolio, but may enable you to better sleep at night and stay the course with the balance of your portfolio
• Bear markets can be a great time to deploy excess cash. While it is nearly impossible to time the bottom exactly, bear markets often provide excellent price points for quality investments. If all of one’s projected liquidity needs are met and there’s still excess cash available, bear markets can be a good point in time to invest. This strategy does require some fortitude, because markets can decline further, but buying into markets at lower overall price points is often a great strategy
• Bear markets provide great opportunity on the tax front. Roth conversions are often more attractive when done in kind during market dips (moving positions from IRA to Roth IRA in kind rather than selling and moving cash) because the overall level of the assets is lower and hence the tax liability is less. Tax loss harvesting in non-retirement accounts is a great way to offset current year and potential future year capital gains.
• This is not the time to chase a “hot dot”. During bear markets, investors are often tempted to make large moves into investments that are up in value. This often leads to buying high and selling low, which is the exact opposite of what investors should be doing. For example, look at Exxon Mobil’s year to date performance:

Exxon is up nearly 60% year to dateⁱⁱ and has performed tremendously. High oil prices and severe supply constraints have led to high earnings and a soaring stock price. While Exxon may have a place in a diversified stock portfolio, a “hot dot” strategy would be to pour huge amounts into energy stocks as they’ve been top performers. While oil may continue to track higher, buying heavily into an asset that has appreciated by 60% in less than six months is usually a poor strategy.

We continue to monitor your portfolios and markets diligently and have enjoyed meeting with many of you over the past several months. As always, should you have any burning questions or if you’d like to connect, please reach out to us at any time.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Diversification, asset allocation and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability. 

Investing involves risk, including loss of principal. Supporting documentation for any claims or statistical information is available upon request.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve. Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Alliance Wealth Advisors, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability a SEC Registered Investment Advisor – 150 N. Main St. #202 Bountiful, UT 84010.

ⁱSource: Harford Funds
ⁱⁱThis was written on 6/13/2022. On the date of publication (6/20/2022), Exxon was trading at a 41% gain. Exxon fell
from $98.85 to $86.12 is less than one week! This underscores the risks associated with chasing performance.