In the past few days, our perusal of financial news coverage indicates investors’ fear has mushroomed beyond COVID-19 containment efforts and their immediate fallout. As the dollar has strengthened—normal during a recession and bear market (a prolonged, fundamentally driven decline in share prices of -20% or greater)—so too, apparently, have fears of companies and governments elsewhere struggling to service dollar-denominated debt. We also see some arguing the pound’s decline reflects a lower likelihood of signing a trade deal with the EU before the 31 December deadline, as well as the UK economy’s vulnerability to a financial crisis given London’s standing as a financial services hub. The gyrating market for corporate debt is seemingly fanning fears of an allegedly long-overdue reckoning in riskier debt securities. Rising sovereign yields appear to have brought Italian debt crisis fears back. Worries of imminent collapse in a smattering of industries—including travel, autos and retail—seem widespread, often carrying a tinge of “this time is different” from the many historical downturns preceding this one. We won’t try debunking any of these for now—we think there will be a time for that later. Rather, we will simply highlight our view that spiralling, spreading fear—a hunt for “the next shoe to drop”—is normal as a bear market worsens and generally not a roadblock to its eventual end.
We think past bear markets provide ample evidence for this. During the last global bear market in 2007 – 2009, fears appeared to morph from banks and subprime mortgages to America’s auto industry, potential hyperinflation due to aggressive monetary policy and a years-long recession on par with the early 1930s. Bank bailouts and fiscal stimulus efforts seemingly drove fears of spiralling debt and deficits. News headlines in late 2008 indicate the surging dollar had many fearing a reckoning; when this reversed course and weakened, we recall headlines touting fears of a dollar crisis. Toward the bear’s end, we even observed people speculating that equity markets could go to zero. Morphing panic is part of a bear market’s evolution, in our view.
We think the 2000 – 2003 bear market had a similar fear morph as the dot-com implosion rippled throughout the broader economy. The tragedy of 9/11, which occurred a year and a half into America’s bear market and six months into an American recession, appeared to add airline industry woes and related pension dread—plus fears over prolonged armed conflict in the Middle East. Accounting scandals at the Energy company Enron and other corporations seemingly drove worries that no company’s financial books were reliable.
The early 1990’s bear market occurred in the shadow of America’s Savings & Loan Crisis and featured a shallow American recession. But globally, investors also grappled with the prospect of German reunification—an extraordinary marker of peace, but one many economists warned carried potentially severe economic consequences for continental Europe if not executed correctly. Meanwhile, Iraq’s invasion of Kuwait appeared to rekindle fears of Middle East conflict. Whilst this was a brief bear market for global equities, European markets continued struggling thereafter, as the crisis over the Exchange Rate Mechanism—and Britain’s eventual sudden exit from it—hampered markets.
In our view, you could perform a similar exercise for all other past bear markets. In doing so, we think you would also see that although some of the accompanying fears are valid and some are false, it wasn’t necessary for all these issues to fade in order for a new bull market (a prolonged period of generally rising share prices) to begin. Rather, our study of history shows the fear spiral usually continued well into the economic recovery. In 2009 and 2010, investors reckoned with high unemployment rates, sovereign debt troubles in Dubai and Southern Europe, American healthcare and financial reform and sky-high deficits across the Western world. In 2003, the invasion of Iraq and the SARS outbreak in Asia (also a coronavirus, in an eerie parallel) seemingly roiled sentiment as shares climbed. In 1991, it was the Soviet Union’s collapse, which threatened to ripple economically through Europe. In 1983, the US invasion of Grenada and a severe American municipal debt default appeared to fan fears. In 1975, it was New York City’s bankruptcy.
Simply put, we don’t think the existence of fears—warranted or not—is reason to be bullish or bearish. What matters most, in our view, is the degree to which those fears are reflected in share prices and whether reality is likely to be marginally better or worse. It is our opinion that the more fear gets baked in, the higher the likelihood of a better-than-expected outcome becomes. Not a positive outcome, mind you—we think incrementally less bad than feared can be enough to help the tide turn.
So in our view, the appearance of new worries, in and of itself, isn’t a reason to become more anxious than you might otherwise be—nor a sign things are uniquely worse now than in past bear markets. Rather, we think it just makes this bear, though unique in its suddenness, similar to its historical predecessors in how it is influencing investor sentiment.
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