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The coronavirus bear market in perspective

March 2020
Marketing Material

How low will we go?

The coronavirus is sending shockwaves through the economy and financial markets. It’s unclear how badly affected they’ll prove to  be, but history can offer some clues.

The effects of the coronavirus are far-reaching. Unlike most other economic shocks, the impact this time will be felt on two fronts. Demand will suffer as people cancel travel plans, stay indoors and earn less money, while the supply of goods and services will take a hit too as factories are idled and supply chains are interrupted.

This double whammy, coupled with uncertainty over how widely the virus will spread, leaves investors in uncharted territory. Still, we believe past downturns can be a useful guide to what the future might hold. Our historical analysis – an examination of every bear market US stocks have suffered since 1950 – suggests the S&P 500 index will experience a peak-to-trough fall of around 20 per cent. In other words, a milder-than-average decline. 

Our study focuses on the economic and financial conditions that prevailed immediately before each bear market of the past 60 years. The goal is to determine whether there is a relationship between stock valuations, the output gap, debt and interest rate levels and the depth of the ensuing correction. The results of the study are shown in the chart.

History of bears
Drop in S&P index (%)  versus Pictet Asset Management’s fundamental and technical factors model (average z-score at time of bear market start) 
History of bear markets chart
The 2020 reading is a forecast based on the model. Z-score is the average of the z-scores for the output gap, credit gap, rates gap, valuation and technicals at the start of the bear market. For details on each individual factor see footnotes. Source: Pictet Asset Management, Refinitiv, CBO, BIS, Federal Reserve, Robert Shiller. Data covering period 01.01.1950-03.03.2020.

A simple regression model of these factors suggests the current correction could see the index drop 20 per cent from its highs compared to the 30 per cent average fall seen during the previous 13 bear markets. That would take the S&P 500 index down to 2,700 – 10-15 per cent below current levels.

It is important to acknowledge than none of  bear markets in our analysis period were caused by a pandemic. No two market corrections are the same, after all. But, during times of market volatility,a historical perspective can be useful.