What Does History Tell Us?

Feature Stories | Mar 25 2020

History is littered with bear markets and recessions. We’re in a bear market and a recession is inevitable. Can history tell us how deep and long this bear market and recession will be?

-Bear markets typically double-dip
-Bear markets vary in cause and duration
-The starting point is fundamental
-The end point is conditional

By Greg Peel

First, let’s consider some charts.

The following charts, courtesy of The Chartist, track “ASX” price movements over past bear markets.

Note that for the purposes of comparison, pre-1980 charts represent a compilation of the then regional exchanges. The All Ordinaries was introduced in 1980 and the ASX was formed in 1987, amalgamating six state exchanges. In 2000 the ASX200 replaced the All Ords.

The most famous stock market crash of them all saw a couple of false-start relief rallies before the final V-bounce, which was arguably as spectacular as the initial fall, despite ushering in the Great Depression. Subsequent volatility from 1937 cannot realistically be considered a double-dip of the ’29 crash, given other problems were mounting.

The first OPEC oil shock sparked the 1970-71 crash, and again a failed relief rally is evident within the fall. There followed the Whitlam government, stagflation, Watergate, the Yom Kippur War and a decade of recession, book-ended by the second OPEC oil shock.

Clearly the first crash was only a curtain raiser for the second, as hyperinflation gripped the world, in the days before central banks had any mandate to control it.

The 1987 crash is the most cited as a comparison for today’s market, in terms of speed. The All Ords fell -5% on the Monday, October 19, and those of us there at the time said thank God that’s over. The All Ords then fell -25% on the Tuesday, and it thereafter took four months to find a bottom.

The so-called “mini-crash” of 1989 then followed, sparked by the collapse of the leveraged buyout market in the US, famously highlighted by Kohlberg, Kravis & Roberts buying out RJR Nabisco in the biggest LBO in history. With that out of the way, the Japanese stock market crashed in 1991, due to a collapse in the Japanese property market, and in 1990, we entered Keating’s recession we had to have.

Thanks to a surge in commodity prices in the period, it took until 1994 for the stock market to respond.

The Australian stock market barely blinked when the Tech Wreck hit US markets in 2000, having minimal exposure to the dotcom sector. But then came 9/11. The bounce out of that event proved ill-timed and we entered the “mild” recession of 2002-03.

The next chart was published by Business Insider in 2015.

It took from October 2007 until March 2009 for the GFC bear market to bottom out around -50% down. There was a false glimmer when the Fed forced JP Morgan to buy out Bear Stearns, but Lehman Bros eventually proved one underwater investment bank too many.

QE1 brought a pretty swift bounce before problems began appearing elsewhere in the world, culminating in the European credit crisis of 2011 and the first use of the word “Grexit”.

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