Thread by @sonusvarghese

Stocks plunged again, but are we close to the end?

Suffice to say I have no idea.

It hasn't paid to be alarmist over the past 10 years i.e. every drawdown was a "buy the dip" opportunity.

But it is useful to look at the other side of the coin: Bear markets.

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1/

Large sustained bear markets, like 2007-2009 or 2000-2002, don't go down in straight lines.

Very frequently, there are reversals, with sharp gains.

Which makes it look like the worst is over.

Then markets fall again, and the cycle repeats. Until final capitulation.

2/

2007-2009 bear market:

S&P 500 fell -57% from its peak in Oct '07 & lasted 17 months.

Yet it didn't become an "official" bear market (-20% drop) until Jul '08.

Until then, there were 3 periods with gains of more than 5% from lows. Including a 12% gain from Mar-May '08.

3/

S&P 500 rallied 7% after it hit -20% in Jul '08, before equities plunged in Sep '08 amid crisis.

Then we saw 5 more rallies of more than 5%, incl. 3 big ones:

Oct 13 '08: +11.6%
Oct 27 - Nov 4 '08: +18.5%
Nov 20 - Jan 6 '08: +24.2%

But the bear market wasn't done!

4/

There was one final crash of -27.6%, before the bottom on March 9 2009.

Though we didn't know it was the bottom, after being scarred so many times.

Markets recovered to prior peak only in March 2013. 4 years after the bottom & 5.5 years after the bear market started!

5/

Next up: Dot-come crash.

Overall peak-to-trough drawdown of -49%, but it lasted 31 months.

Again, we didn't see a -20% fall until Mar 2001, one year after the peak. During that year, there were 3 draw-ups of more than 5%.

Not much of a crash, except with 20/20 hindsight.

6/

The peak-to-trough drawdown hit -26% soon after 9/11.

But guess what, there was a 21%+ rally after that, from Sep '01 to Jan '02.

Following which there was a -32% meltdown which lasted 7 months, through July '02.

But the bear market was not quite done ....

7/

Another 5-month roller coaster ensued.

Jul 23 - Aug 22 '02: +20.7%

Aug 22 - Oct 9 '02: -19.3%

That was the "official" end of the bear market for chart makers like myself, with the benefit of hindsight obviously.

8/

Markets rallied 20.9% between Oct - Nov 2002, and then proceeded to fall almost 15% over the next 3.5 months.

And that was it.

The S&P 500 staged a 39% rally between Mar 11 2003 (17 years ago today) and the end of 2003.

9/

But the S&P 500 price index recovered to its 2000 peak only in May 2007.

More than 4.5 years after the bottom & 7 years after the bear market started.

Obviously we know what happened soon after (scroll up).

10/

The last two bear markets were crushing, and it took a while to really get going.

The one before that, 1987, was a bear market that headed straight down. No false alarms.

Overall peak-to-trough drawdown: -33.5%

11/

Markets crashed on Oct 19 '87 but rallied 13% over the next two weeks.

Then fell 12% again.

"Official" bottom on Dec 4 1987, 100 days after the decline began.

But the S&P 500 still needed another 20 months to recover to prior peak.

12/

Bear markets are completely different from corrections, which happen more frequently, and have had relatively faster recoveries.

See my previous thread.

https://twitter.com/sonusvarghese/status/1237451383248498689?s=20

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There were several opportunities within past bear markets to "buy the dip", but it would've been followed by steep losses as markets fell further.

Making you doubt yourself time & again.

And amid corrections, it's hard to say before the fact that it will recover quickly.

14/

Only with the benefit of hindsight could I classify these as long, sustained bear markets or corrections.

Not only do we not know what the next bear market will look like, but we also won't know how long it'll last.

Only that it'll be painful. Maybe that's the tell!

15/

Of course, all this is from a chart/numbers perspective. And this is just the S&P 500 price index (I ignore dividends).

Most investors may be under/over weight sectors, factors and regions, not to mention diversified across equities/bond/other strategies (hopefully).

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