National Post (National Edition)
There’s only a 20% chance stocks have hit bottom — if past recession markets are any guide.
What I love about our business is the eternal optimism. There will be growth in the spring, as Chauncey Gardiner would say. Google “Picking a Market Bottom” and you get 309 million results. Oh, but google “Picking a Market Peak” and all you get is 138 million.
In any event, if picking bottoms is your thing, I have news for you: In the markets, as in life, the higher you are, the harder the fall. It’s also never about historical per cent changes cycle by cycle, but the reversal from the prior market condition.
In this case, establishing a range of scenarios is most helpful and involves assessing how much of the previous bull market is unwound in the next bear phase. We looked at prior recession-era bear markets back to the Great Depression. On average, 83 per cent of the prior bull market is reversed in the bear market and the median retracement is 69 per cent.
What that means is that if this current downturn is an average cycle, the low on the S&P 500 would be 1,135. The median performance would peg the low at 1,515.
Of the past 10 recession-era bear markets, two were nearly 30-per-cent retracements, four were between 50 per cent and 80 per cent, and another four were complete round trips (and then some).
If we luck into the two more modest retracements, the S&P 500’s low will have been turned in already (2,613 would be that magical level). But history suggests this has a 20-per-cent chance of occurring.
Using the eight cycles of the post-Second World War era, the average reversal in the bear market is 71 per cent and the median is 54 per cent. This would imply a final trough of 1,455 (average) or 1,798 (median). Take your pick.
The historical pattern of recessionary bear markets would suggest we have a 20-percent chance that the lows are already in, but it’s more likely that the S&P 500’s bottom is somewhere between 1,500 and 1,800.
As an aside, in terms of picking bottoms, what about bonds? On this score, yields almost always decline in recessions point-to-point, and typically by 100 basis points. This means a low of 0.1 per cent for the 10-year T-note yield and 0.6 per cent for the long bond.
Finally, if you add Amazon.com Inc. (consumer discretionary), Facebook Inc., Netflix Inc. and Alphabet Inc. (all three in communication services) to the tech sector (all four are what we used to label TMT — technology, media and telecom — during the dot-com era), we basically have 40 per cent of the S&P 500 weighted to one sector.
That concentration is pretty insane, not to mention completely unbalanced. Even after this massive corrective phase, the U.S. equity market looks as unhealthy as ever.
IN THE MARKETS, AS IN LIFE, THE HIGHER YOU ARE, THE HARDER THE FALL.
David Rosenberg is founder of independent research firm Rosenberg Research & Associates Inc.