Tracking Stocks' Behavior During a Bear Market

Data shows there's a 50% chance the SPX will reclaim its late-February peak in 2.7 years

Senior Quantitative Analyst
Mar 18, 2020 at 6:30 AM
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A couple weeks ago, I wrote about a 10% correction for the S&P 500 Index (SPX). Now we've graduated to a 20% pullback, often referred to as bear market territory. This week, I'll go over prior bear markets to see how this one compares and hopefully it will give us insight into what to expect going forward.

From High to Bear Market

 Since 1928 there have been 10 previous bear-market pullbacks of more than 20% for the S&P 500. The table below lists the dates when the index first hit bear market territory and other information on how quickly it declined, how big the loss eventually got to, and how long it took to get back to the previous highs.

The first thing to note is this was the quickest bear-market decline in history. The S&P 500 peaked on Feb. 19 and about three weeks later it was down over 20%. The next fastest decline was about a month and three weeks, occurring in 1929, kicking off the Great Depression. The October 1987 occurrence was similar in speed of the decline. The brunt of that decline happened on one day, Black Monday, in which the S&P 500 fell over 20% on a single day. Note the typical number of trading days from the market peak to a 20% decline is around 175 trading days which equates to about eight or nine months.

The S&P 500 currently sits around 25% off it's most recent all-time high. You can see in the table below how big the pullbacks eventually got and how many days after hitting a 20% loss it took to reach the trough. Looking at the median levels, bear markets have bottomed at around a 35% loss which has happened about 100 trading days -- roughly five months -- after hitting the 20% loss mark. Quick turnarounds have happened with the market bottoming the very next day after the 1957 bear market decline and three other pullbacks on that list bottoming in less than two months (about 42 trading days) including that 1987 signal in which the decline was especially violent.

The last column in the table shows how long the stock market has taken to get back to those all-time highs before the 20% decline. Based on the median of these ten results, there's a 50% chance it will take over 2.7 years before the S&P 500 gets back to the Feb. 19 highs.

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Oil and Gold Prices During the Decline

 I was curious how other assets performed during these huge market selloffs. Gold held its own during the recent bear market decline but oil has collapsed. Interestingly, the only other bear market which saw oil decline was the one that happened in 1982 and the decline was puny compared to the recent 40% loss. Oil went during all other occurrences and a couple times significantly. So, we've never seen oil do this before during a bear market in stocks.

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AAII Investor Sentiment 

Finally, the last two columns in the table below show how the percentage of bulls changed in the sentiment survey by the American Association of Individual Investors (AAII) during the 20% pullbacks. The bulls were just over 40% at the market top on Feb. 19. This was a lower starting position compared to the other bear markets going back to 1987 -- the first year we have AAII data. Therefore, the decline of just over 10% is smaller compared to the other years in which the decline in bulls ranged from about 28% to 34%. The level of bulls, however, is comparable to the levels after the other 20% drops.

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