Over the past few weeks, we have heard words and phrases that we never thought we would ever have to know. Idioms like “flatten the curve” and “social distancing” have essentially become part of our daily language. There has been a high degree of connectivity to what we have seen with the health crisis and what we have seen happening to the overall economy. Words like recession and bull and bear have become part of the global health conversation as we have had to adapt our global economies to the current conditions.
While we are not medical professionals and cannot add context to the healthcare area, we are experts in the fields of finance and economics. We want to provide you with context to some of the hot financial topics.
Bull and Bear markets–these are terms to describe overall investor sentiment regarding the markets, typically used to describe the equity (stock) markets. Bull markets indicate increased optimism; conversely a bear market: increased pessimism. The technical definition for a bear market is utilized more than that of a bull market. When a market drops 20% from its highest point it has entered a bear market. We saw that happen a couple of weeks ago; all three major indexes (S&P 500, Dow Jones, and Nasdaq) all dropped over 20% from their February peak to enter a technical bear market. Typically, a bear market lasts on average about 14 months, while a bull market lasts roughly 4.5 years. On average, when the recovery begins, it takes about 1.5 times as long to recover from a bear market as it took to fall from the top to the bottom.
With a better understanding of the market spirit-animals, how do they fit into context of what we are seeing now? As we mentioned, technically the indices fell into a bear market in the middle of March. We fell at a pace that has never been seen before in conditions we have never felt before. Now for the good news. Using technical definitions, as of last week we have reentered a bull market, rising 20% from the lowest point. Market conditions seem to change with the week and only time will ultimately tell where the markets are truly headed and we still need more time to determine the appropriate level of investor optimism.
What trends have we been able to identify over the past couple weeks?
· Fear (in the markets) is beginning to subside. While it is still elevated, it is starting to slowly notch back down, rather than continue on an upward trajectory.
· The volume of transactions, while much higher than usual, is still relatively low for the movement we have seen. Like you, most people are waiting this out.
· This is not a repeat of 2008. 2008 was the result of systemic issues. We do not have that right now. We have a mandated temporary closure of business. We do not, as of right now, have systemic issues. Which leads to the final point…
What is a recession and are we there? A recession is an economic term, and like most concepts in economics, there is a technical definition and then there’s reality. Technically speaking, a recession is when we see our economy shrink in 2 consecutive quarters. It marks the end (or the beginning) of a business cycle. We don’t know yet if this will cause a technical recession or not, our thoughts are that it will not, mainly due to the timing of the shutdown. So why is everyone already saying the recession is here? Getting away from the technical term, fundamentally a recession is a significant decline in activity throughout the economy, lasting more than a few months. We would say we are on the path to meet that definition, but with a caveat.
As we said before, this is not 2008. The root cause of the situation is not the result of a systemic issue, we did not have poor fundamentals going into this. We have been forced to shut down the global economy to deal with a health crisis. Unlike what we saw in 2008, we have seen relatively swift action to mitigate the impact of this; when we reopen (which we will) the economy will continue to grow again.
Economic and market talk is not for everyone, but we do feel that when we are inundated with verbiage on a daily basis as we battle this pandemic, it is important to keep things in context. As you talk to family, friends, or neighbors (from a safe distance), if that context seems to be missing for them, we are calling on you to be a calming force for them. Provide them a copy of this letter or send us their address so we can send one for you. Just as we have acted as a ballast for you, we hope to be able to help guide them through these conditions before they make decisions that can, quite literally, alter the rest of their lives.
We hope you continue to stay safe, healthy, and sane through these times, please continue to reach out with concerns. We look forward to hearing from you if there is someone you believe we can help guide through these challenging times.
Ryan Flanders, CFA