The global stock market has been in ‘bear’ territory for the past 300 days or so, according to data by Quilter Cheviot, but this longevity suggests we are nearer to the end than the beginning.
Looking at the previous nine bear markets – defined as stock markets declining 20% from their most recent high – the average sell-off lasted 315 days.
We are currently in the longest bear market since the financial crisis, but David Henry, investment manager at Quilter Cheviot, said that things have changed since then.
He pointed to computerised trading, the ease of access to information and more interventionist central banks as reasons why now may be a good entry point for investors willing to take a punt on the nadir of the falling market.
“The data suggests that we could be nearing the end of this particular bear market, but of course the process can go on for longer,” he said.
Although there are no concrete signs that we are near the bottom, when the market does turn, it can do so at pace, as the below table shows.
The average return on the day following the market bottom is 3.2%, with one month returns at 14.2% and six-month figures standing at 30.4%.
Table of market returns in different bear markets
Source: Quilter Cheviot based on MSCI World index data
“When markets go down a lot, volatility (the amount that the market moves around day to day) tends to spike. This means that when we do eventually reach the bottom, the elastic band tends to snap back quite hard and returns in the early stages of recovery have been high,” Henry said.
He added that the current generation of young investors are “too quick to buy the dip”, but noted that this may not be a bad thing and in some cases may be exactly the right thing to do, even if it means being too early.
“I would even go as far as to say that a small dose of naivety can be helpful at times – better to be proactively putting cash to work than constantly waiting for the next monster to emerge from under the bed. At some stage they stop appearing,” said Henry.
The current market conditions could change if inflation shows signs of abating, or if central banks take their foot off the gas and slow interest rate rises.
Another potential option is that company earnings turn out to be better than expected, while there is also a school of thought that suggests the market could simply hit ‘peak fear’ with no single catalyst required for a bounceback.
“You have to still be in the game by that stage to benefit of course, and this is why time in the market is so important,” said Henry.
“Trying to time the bottom is a fool’s game and likely to mean you miss out on the best short-term returns. These returns tend to occur during periods of maximum pain, but no one said this investing malarky was easy.”