The attached note looks at the hit to economic growth from Coronavirus and whether it’s a recession or a depression or something different altogether. The key points are as follows:
- Global share markets have fallen into a bear market, but whether this turns out to be long or short depends on how long the hit to the economy from Coronavirus lasts.
- There are big differences between the current disruption to economic activity – which could be very deep in the short term – and past recessions and depressions.
Global and Australian shares have fallen well beyond the 20% decline commonly used to delineate a bear market. From their highs to their recent lows major share markets have had roughly 35% falls as investors have moved to factor in a big hit to growth from coronavirus shutdowns. Recession now looks inevitable and they tend to be associated with deep and long bear markets, but now there is even talk of depression suggesting an even deeper bear market. In reality, there are big differences now compared to past recessions and the Great Depression, so it really looks like an economic hit like no other with very different implications for the bear market in shares. But let’s first look at past bear markets as they provide some lessons for investors regardless of the cause.
The two bears – gummy & grizzly
There are 2 types of bear markets in shares:
- “gummy” bear markets with falls around 20% meeting the technical definition many apply for a bear market but where a year after falling 20% the market is up (like in 1998 in the US, 2011 and 2015-16 for Australian & global shares); and
- “grizzly” bear markets where falls are a lot deeper and usually longer lived (like in 1973-74, US and global shares through the tech wreck or the GFC).
I can’t claim the terms “gummy bear” and “grizzly bear” as I first saw them applied by stockbroker Credit Suisse a few years ago. But they are a good way to conceptualise bear markets. Grizzly bears maul investors but gummy bears eventually leave a nicer taste (like the lollies!). The next table takes a closer look at bear markets. It shows conventionally defined bear markets in Australian shares since 1900 – where a bear market is a 20% decline that is not fully reversed within 12 months. The first column shows bear markets, the second shows the duration of their falls and the third shows the size of the falls. The fourth shows the percentage change in share prices 12 months after the initial 20% decline. The final column shows the size of the rebound over the first 12 months from the low.
Based on the All Ords. I have defined a bear market as a 20% or greater fall in shares that is not fully reversed within 12 months. Source: Global Financial Data, Bloomberg, AMP Capital