John Romano, CFP®

Bear Market - Straight Talk

BEAR MARKET

No happy talk, but straight talk here.

During this recent market meltdown, I happen to look back and noticed that this was the sixth bear market that I’ve experienced since I’ve been an investment advisor.  This is the first one that I have been through was not caused by a recession.  During this economic downturn, certain businesses are grinding to a halt.  Technically, a recession is two succeeding quarters that GDP goes negative.  I’m not quite sure we are going to meet that technical definition because the first-quarter GDP is going to be positive.  But I can tell you this, the second quarter of April, May, and June will likely be down.

Bear Market Basics
After more research, I found that we have had 14 bear markets since 1929.  The average bear market had a negative 39% return from the prior market high.  But the average return one year after the trough of the bear market, the market had an average return of 47%. So where are we now? As of March 16th, we are down 33% from our February 14th high. 
Well, what’s the difference? The velocity of the move down is different.  Normally a bear market takes months and months to develop and this was just a matter of a few days.  In most cases, the market leads the economy.  The market is a good predictive indicator of where the economy is heading.  Think back to April 2009.  The economy was struggling, however, the market started to power up even when the economy didn’t improve for months. 

The Markets don’t like Uncertainty

As I stated before, markets are a predictive mechanism of the economy months down the road.  Since the potential outcome of the COVID-19 virus has a tremendous variance, this is driving the volatility.  As more data comes in, we can see if it’s possible to bend the infection curve - which will allow our health care system to handle the potential overload. It will give us a better predictive mode of how this COVID-19 is going to work out.  A pretty good indicator right now to watch is probably China and South Korea.  They seem to finally have gotten everything under control.  And what I mean by that is that it’s not done over there, but the number of new cases and the number of newly infected cases has not accelerated.  In fact, it is decelerating.

My thoughts:  Tremendous change is ahead for certain industries.  Indeed, there’s a lot of businesses that are going to go out of business.  I have always wondered about businesses that didn’t squirrel away one to three months of cash to handle recessions or bad times. 

There will be tremendous disruption in airlines, cruise ships, transportation, restaurants, conventions, meetings, concerts, and any type of venue where large groups of people are together.  But there will also be tremendous opportunities, which we are seeing now with more work at home, teleconferencing, grocery deliveries, etc.  I further believe that this is going to help streamline our medical process to get new drugs online quicker. 

What should you do as an investor?
 

  • Understand this is not a recession caused by a weakening economy, but rather a recession caused by a one-off, it’s a big one-off.  In this case, it’s COVID-19.  So, in other words, don’t expect years for a recovery to happen.  I think the recovery will be very quick, maybe in a matter of months, certainly not in years.  It looks like to me and other investment advisors that the bulk of the damage has already been done as far as the stock market is concerned.
     
  • Remember with the last 12 recessions the average downturn was in the ’30s and within one year after the market bottomed out, the market was up 47%.  The Fed and the Treasury Departments are aggressively
    throwing money into the system to stimulate the economy.  Hopefully, our medical professionals, which I believe are the best in the world, can get the COVD-19 under control soon.

     
  • If the American people can see light at the end of the tunnel (which I identify by watching the infection rate certainly not stop, but slow down) I believe optimism will return.  That is one of the main ingredients of a bull market.  Stay safe.

Thank you,

John Romano, CFP


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John Romano, CERTIFIED FINANCIAL PLANNER™, has over 30 years’ experience in the financial field. John is a Registered Representative with Securities America, Inc. (member of the FINRA and SIPC), and an Investment Advisor Representative with Securities America Advisors. He has prepared hundreds of reports for retirees to assist in their retirement income planning needs. He is dedicated to providing portfolio analysis, dividend and income information, and investment management services to retirees (and those preparing to retire) in The Villages, Florida, and throughout the United States.

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