Coronavirus Ends Bull Market, New Bear Market Underway
By: Christopher Mistal
March 12, 2020
After another disastrous day for the market, the second longest bull market since 1949 appears to have come to an end. DJIA’s worst single-day decline since 1987 today (–10.0%) expanded its decline to –28.3% from its February 12 closing high. From their closing highs on February 19, S&P 500 is currently down 26.7% and NASDAQ is off 26.6%. Small caps, measured by the Russell 2000 are down 35.5% from its all-time closing high set on August 31, 2018. The commonly used 20% decline definition of a bear market has been satisfied.
Not unlike many of the bear markets of the past, the current bear has manifested itself on sharply rising expectations of an economic recession due to the ever-widening impacts of the coronavirus. Whether or not a recession does follow is still an unknown. Central banks and governments could still take aggressive measures to head off or at a minimum possibly reduce the economic toll from the virus. Science could also arrive at a solution sooner than expected. Uncertainty is off the charts and the market is responding as such.
There are optimistic and pessimistic scenarios of all degrees. History suggests that someplace in the middle will be the actual outcome. With history as a guide we present a familiar table with S&P 500 bull and bear markets going back to 1948 with NBER recessions. Prior to now there have been eleven S&P 500 bear markets with an average duration of 407 calendar days and an average peak to trough decline of 33.1%. Three bear markets ended with declines of less than 25%. The shortest duration bear was 101 calendar days in 1987. Four bear markets did not have a corresponding recession.
[S&P 500 Bull, Bear, Correction, Recession Table]
Yes, this time is different, but not completely so. Uncertainty, fear and panic have gripped the nation and the market in the past. Painful lessons were learned then and new ones are likely to be taught now. Excesses in the past were resolved and are likely to resolve again. Stop losses in the Almanac Investor Sector Rotation ETF and Stock Portfolios have been triggered and market exposure has been reduced. Our Tactical Seasonal Switching Strategy is underwater now, but we will continue to hold these positions as a rebound or bounce remains likely. Past bear markets did have positive days, weeks and even months before they ended.
Stock Portfolio Update
In the time since last update through yesterday’s close the Almanac Investor Stock Portfolio declined 6.2% compared to an 18.9% decline by S&P 500 and a whopping 25.2% decline from the Russell 2000. Our Small-Cap portfolio which consisted mostly of Free Lunch stocks at the start of the year was cleaned out last update and was entirely in cash for the last four weeks. Mid-Caps declined 8.5% on average over the last four weeks. A sizable cash position helped buffer the decline. Large-Caps were the worst performing portion of the portfolio, off 12.7%. Losses were mitigated in the Large-Cap portfolio by defensive holdings that have remained since June 2018 as well as some strength from Regeneron (REGN) and ZTO Express (ZTO).
In the Mid-Cap portfolio, three positions were stopped out. South Jersey Industries (SJI), American Eagle (AEO) and Steelcase (SCS). All three positions were stopped out near the end of February. Algonquin Power (AQN) and One Gas (OGS) were stopped out today. In the next update AQN and OGS will be closed out. The last remaining position in the Mid-Cap portfolio, Pattern Energy (PEGI) is being acquired for $26.75 per share and the transaction is expected to close shortly.
A total of fourteen positions have been stopped out of the Large-Cap portfolio. Seven positions were closed out for a gain while seven were closed out at a loss. Aramark (ARMK) was the biggest loser, down 22% as it rapidly sank below its stop loss and failed to muster a meaningful rebound. On a less negative note, Qorvo (QRVO) was closed out for a 22.5% gain. Today, ABT, CHD, MDLZ, BRO, EXPD, NI, D, T and VZ were all stopped out. These positions will be closed out in the next update.
Remaining positions in the portfolio are currently on Hold. Please see table below suggested stop losses.
[Almanac Investor Stock Portfolio Table – March 11, 2020 Closes]