Back on March 16, I called the unfolding rout in risk assets a “speed demon”.
It wasn’t clever. I had to choose a title for a chart, and chart titles have to be short and some semblance of snappy. So, “speed demon” is what came out.
Trivial though it was, the title was apt. As BofA pointed out at the time, “the current bear market (which took 21 days to reach a 20% decline) is so far the fastest bear market in history since 1929”.
Since the coronavirus crisis began to manifest in wild market swings around six weeks ago, even veteran traders have been left to marvel at the sheer absurdity of the daily rollercoaster.
Of course, not everyone was surprised – or at least not at the rapidity with which things unraveled once volatility surged.
The likes of JPMorgan’s Marko Kolanovic and Nomura’s Charlie McElligott have repeatedly warned that a VaR shock of sufficient magnitude could tip enough dominos to set in motion the dreaded “doom loop”, something investors got a preview of in February 2018 and at various intervals since, but never experienced in earnest until last month.
Fast forward a few weeks, and we’re now in the middle of what certainly appears to be a short-covering rally, perhaps helped along and otherwise turbocharged by re-leveraging from CTAs and other systematic investors.
Vol.-targeters, risk parity and trend-followers all came into the week with exposure still sitting at or near the lows. With market depth still impaired, any buy “impulse” is amplified.
On Monday, South Korea’s Kospi became “a bear in a bull costume“, rallying into bull market territory despite still being mired in technical bear market which began just weeks previous.
On Tuesday morning, the S&P likewise surged into a bull market intraday, putting US stocks in the same boat with South Korean equities – namely, in a bull market and bear market at the same time.
It goes without saying that this is a meaningless “milestone” and can’t be taken seriously, but it’s an amusing oddity nonetheless. The global risk asset bellwether par excellence took just 21 days to fall into a bear market – ending the longest bull run in recorded history – and just 28 days to climb out of it, on a technical definition (and on an intraday basis).
In a piece out last month, Bloomberg noted that going back to 1927, the index that eventually became the S&P 500 has suffered through 14 bear runs, where that’s defined simply by the index closing 20% or more below a record high. If you count the bear market as persisting until the S&P either doubles from the low or rises above the high seen prior to the bear market, the average length of the bear runs is 641 days.
During those stretches, the S&P has had 20 rallies of 15% or more, on Bloomberg’s data. Some of them have been quite spectacular, and while many proved fleeting (some as few as two days), others were longer in duration, calling into question the very concept of “bull” and “bear” markets.
Obviously, one can do well braving a challenging market and playing for a bounce.
But, it’s perilous. “The typical gain was in the region of 25% but to collect that, an investor had to reach into the jaws of a bear that on average doled out a 41% loss, and often much worse”, Bloomberg wrote on March 31, adding that “in fact, declines were on average bigger in bear markets that contained a rally, at 47%”.
The message, one supposes, is that if you fancy yourself a “Grizzly Man”, just remember that things went really well for Timothy Treadwell – until they didn’t.