A Little Guide Post

March 26th, 2020

This is a very quick guide post to assess ‘downturns’.  Note it doesn’t include market corrections such as that in the Fall of 2018 or the recession of 1990-91.

How long does this last?   No one can tell you that, but history does provide some examples – each different – that can help you understand that there are options other than a ‘V’ bottom.

Here is some guidance to help out:

Below are four major market downturns that are frequently studied because of their brutal nature.   They each have different characteristics, but this data simply measures the month of the market high, and how long it took to regain that high mark.

Date of Peak     Peak Value       Recovery Date                       Period

Sept 3, 1929           381.17                1954  (Dow Jones)              25 years

August, 1987        337.88                 July, 1989  (S&P)                 23 months

March, 2000       1,553.11               October, 2007 (S&P)           7 years, 7 months

October, 2007    1,576.09                March 2013 (S&P)              5 years, 7 months

I also went back to look at the last downturn (2007-2009) and looked at the ‘local minima’, that is intermediate bottoms.   The S&P 500 index peaked on October 11, 2007 at 1,576.09.   It then sold off at various levels until hitting the ultimate low of 666.79 on March 6, 2009 about 17 months later.

There were ‘bottoms’ on

  • January 23, 2008 (4 months) 1270.05 (19% from the high)
  • March 17, 2008 (5 months) 1,256.98 (20% from the high)
  • July 15, 2008 (9 months) 1,200 (24% from the high)
  • October 10, 2008 (12 months) 839 (47% from the high)
  • November 21, 2008 (13 months) 741 (53% from the high)
  • January 20, 2009 (15 months) 804.47 (49% from the high)
  • March 6, 2009 (17 months, the ultimate bottom at 666.79 (58% from the high)

2007-2009 Market Decline

The stimulus being announced is substantially larger than that used to stop the declines at any time in history in dollar terms, but the size of the economy and it’s breadth is substantially larger.   Here are some figures to help clarify key economic metrics.

GDP09       GDP19          Debt (09)   Debt (19)

  • World           60 T         87 T              34 T              58 T
  • US                 14 T          21 T              11.9 T          23 T
  • Canada       1.38 T       1.73 T            950 B           1.9 T

(The debt numbers are public debt, not corporate debt, personal debts, etc.)

It is speculation to guess that the outcome will be better than other significant downturns.  Given that this downturn is caused by a ‘human’ malaise, rather than an economic malaise, it is unlikely that money will resolve the problems.

The events of the past month have brought major markets down faster than ever, and the past three days have represented the fastest ‘bounce’ ever.   Each of these unusual events will undoubtedly be causing an emotional roller coaster.   Please be calm and get used to it.

I put out the data above, because it is unlikely that the markets have begun a steady climb upward to their old highs.    The more likely scenario is that there will be many months of economic damage to work through causing further significant (if not so dramatic) moves in the market and some of them may take prices lower again.

Telling others when to buy or sell investments is a great way to lose friends.   Please don’t think of this as advice.   Be cautious.

It is unlikely that the economic damage has been completely factored into anyone’s assessment and that means that any prices of investments are not yet based on reliable measures (book values, revenues, debt levels, profit margins, growth rates, all of the common elements used to value securities will be less reliable for two or three quarters at the very least).   Put simply, you should expect prices for individual securities to fluctuate substantially for some time to come.  After a 30% drop, some may be undervalued, but the biggest risk is that they are overvalued.

[The featured image is from the front of Teatro Massimo (Opera House) in Palermo, Italy.   A little bit of the world’s beauty to hopefully bring some comfort as things get crazy.]

 

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