Jim Paulsen, chief investment strategist at The Leuthold Group, notes the first 22 days of this bear market declined 6.5 times faster than all post-war bear markets, dropping 32 percent in 22 days versus an average of just down 5.1 percent for the previous bear markets.
What makes this bear market so unnerving is that its roots are in a public health crisis, shutting down the economy to battle coronavirus, rather than the typical factors behind economic slowdowns.
But bear markets, and market crashes, do end. In a statistical lookback, Sam Stovall, chief investment strategist at CFRA Research, notes from December 31, 1945, through the first quarter 2020, there were nine “garden variety” bear markets with an average of 2 percent losses from peak to trough and took 14 months to recover. The three “mega meltdown” bear markets, which he defines as more than 40 percent drops, had an average peak-to-trough loss of 51 percent. They took 23 months to decline and 58 months to recover.
Commonalities Among Market Crashes
Market crashes, like the current one, have individual triggers, but they also have commonalities, says Scott Nations, author of “A History of the United States in Five Crashes: Stock Market Meltdowns That Defined a Nation.” He studied five market crashes for his book: 1907, 1929, 1987, 2008 and the 2010 “flash crash.” He says looking back at those crashes can put the current crash in context.
“All the crashes were shockingly similar, even though there’s more than 100 years from the first one to the last one I talked about,” Nations says.
Similarity number one between then and now: They all had some sort of external non-financial catalyst, he says. In 1907, it was the San Francisco earthquake, absorbing all of the U.S.’s liquidity to rebuild the city, which was the most important financial center in the western half of the U.S. The 1987 crash was triggered by worries over a potential war with Iran after the country attacked U.S.-flagged oil tankers and the U.S. retaliated.
The magnitude of 2020’s crash is also similar to other crashes. Although 2008’s crash from peak-to-trough was more than 50 percent, the 1907 and 1987 drops were about 36 percent from their respective peaks. That’s close to 2020’s decline, when measured from the highs. All five crashes occurred when markets were at or near all-time highs, just as the current market was at the end of 2019.
Nations says 1929 is an outlier to the rest because the Federal Reserve and the federal government bungled the response. The model for Fed action is what Chairman Alan Greenspan did in 1987.
“Greenspan issued a terse, 30-word statement which essentially said, ‘We have all the money in the world. We’ll give it to you if you need it. So, banks, don’t cut off your customers,’” Nations says, which is why the 1987 crash didn’t affect the economy, and in 2008, the Fed’s actions and government programs helped stem the fallout from market crash.
Examining Technical Charts