The bull market is over and with no sign of a bottom forming, what are the chances this sell-off turns into something really epic? Going strictly by history, the odds are not overwhelming, though the unique speed of this rout is reason for concern.
Twenty times over the last 120 years has the Dow Jones Industrial Average completed the 20% decline that traditionally defines a bear market. In 12 of those instances the pain kept going for another 10 percentage points — including the two before this one.
Whether that comforts you depends on where you locate the coronavirus among the hierarchy of past threats that have included the global financial crisis and the bursting of the internet bubble. One thing that is different now is the velocity of the downdraft that began last month. Among plunges that started right at the top, it’s been the fastest 20% decline ever recorded.
A drop that quickly extended the S&P 500’s overall decline to 30% — while intensely painful for bulls — wouldn’t unwind the calendar all that much. It would just take the index back to levels last seen a year ago, a reminder of just how furious the last leg of the rally was — and how ripe it was for a reversal. Sell-offs that get to 30% usually wipe out run-ups almost three times as long.
The rout showed little sign of slowing Thursday. Waves of selling sent the S&P 500 down 7% in the first five minutes of trading, setting off marketwide circuit breakers that paused trading for 15 minutes. At the break the index was down almost 25% from its February high.
Naturally, other outcomes are possible — the pain already priced into stocks has reduced valuations at breakneck speed as investors attempted to price in the impact of the coronavirus on the global economy. The market could rebound from here — it’s bounced at roughly 20% twice before since 2009. Alternatively, the pace of the decline could slow — though patience hasn’t been a hallmark of a market whose average swing this week is almost 6%.
“The velocity of this decline has been tremendous,” said Marvin Loh, senior global macro strategist for State Street. “It’s a grind up and then all of a sudden the floor comes out.”
Intense up-and-down volatility over the last several sessions shows the S&P 500 “eerily tracking” the route traced in September and October of 2008, the height of the financial crisis sell-off, wrote Nicholas Colas, co-founder of DataTrek Research, in a note Thursday.
“The S&P 500 was down 17% in October 2008; we’re only off 7% so far in March 2020,” he wrote. “We still like buying every +5% down day for risk-tolerant investors; everyone else should wait or consider reducing risk.”
It’s not easy to remember amid all the chaos, but on the way up the S&P 500 traveled 44% in 14 months, from Christmas 2018 to Feb. 19. In terms of progress on the calendar, that’s a relatively short period to undo. Since World War II, only five bear markets featured stocks falling that far. Four required the reversal of significantly longer runups.
Read more: Bull Market Ends Like It Began: In Chaos, Without Any Warning
So blame the sell-off on the coronavirus or oil’s plunge. But don’t forget what went before. From early October to its 2020 peak, the S&P 500 jumped 17%, an expansion that should the bull market end now would qualify for the second-fastest — at this late stage — ever recorded.
A Deutsche Bank AG model that aggregated fund positioning showed that money managers went “extremely overweight” on stocks in early February, with its positioning indicator sitting at the 95th percentile of a 10-year range. As things started to unravel, bulls rushed for the exit. Last week, the firm’s positioning indicator sank to the 5th percentile.
So sudden and swift has been the sell-off that investors may find it challenging to navigate, according to Jeff Mills, chief investment officer of Bryn Mawr Trust.
“It’s been really hard to react,” Mills said. “At this point in time, if you didn’t have a plan in place already for your portfolio, trying to make moves now is very difficult.”
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