Investments

A Recent History of Bear Markets

By Dean Barber

June 2, 2022

A Recent History of Bear Markets


Key Points – A Recent History of Bear Markets

  • How Does Our Current Situation Compare to the Bear Markets of the Dot-Com Bubble and Great Recession?
  • Looking at the Bear Market Rallies of the Dot-Com Bubble and Recession
  • The Fed’s Tight Rope Walk Continues
  • Could We Soon See Stagflation?
  • 20 minutes to read | 38 minutes to listen

Clarity, confidence, and control within your financial plan is of the utmost importance right now amid these turbulent times in the markets so you can accomplishment your goals in retirement. Dean Barber and Bud Kasper review a recent history of bear markets and how you can stress test your financial plan through periods like the Dot-Com Bubble and Great Recession.

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Navigating Through a Bear Market

Dean Barber: Thanks so much to those who join us on America’s Wealth Management Show. I’m your host, Dean Barber, along with Bud Kasper.

Bud Kasper: We have a lot to talk about today.

Dean Barber: We want to provide a little bit of education on bear markets and bear market rallies. How do you navigate these times and still have the clarity and confidence that you can accomplish your overall objectives? If you’re heading into retirement, you want to know that you can get there and be OK. If you’re already in retirement, you want to be certain that you can continue to get the income that you need from your investments to be OK. Everybody wants to know, “What’s going on right now? Am I going to be OK?”

Bud Kasper: I heard a definition of a bear and bull market the other day. And I’m totally serious with this. They said the reason they call it a bear market is when a bear attacks you, he’s always pulling down with his claws. And when a bull attacks you, he is pushing up with his horns. That’s where they came up with bull and bear.

Dean Barber: I thought the bull market definition was a random market movement that makes an absolute idiot feel like a financial genius.

Bud Kasper: Well, obviously, you know them.

Bear Market Rallies Can Be Like Bear Traps

Dean Barber: All kidding aside, though, bear market rallies can feel good in the moment. But in our industry, they are also sometimes referred to as a bear trap. It may sound like an oxymoron, but a bear market rally is a rally that takes place in the stock market while the market is amid a bear market. Within a secular bear market, which is a longer-term bear market, you can have a cyclical bull run.

I want to point that out by talking first about the 2008 financial crisis, the Great Recession. Bud and I know the pain that the markets and many people suffered through during from late 2007 through early March 2009. The S&P 500 lost around 54% from its high to its trough.

Bud Kasper: That’s correct.

Reflecting on the Bear Market Rallies During the Great Recession

Dean Barber: There was a lot of pain that went on during that period. However, during that time, there were 10 bear market rallies that were considered a cyclical bull market within that longer-term bear market.

Bud Kasper: Yeah. Head fakes.

Dean Barber: Head fakes. Yeah. Or bear traps. In the early part of the Great Recession, there was a nine-day rally that brought the market up by 3.7%. A couple of months later at the end of 2007, there was a 14-day rally that brought the market up by 8.1%. In mid-2008, there was a 69-day rally that took the market higher by 13%. Even as late as August 2008, there was a 26-day rally that brought the market up by 8.1%. In October 2008, there was a four-day rally that took the market higher by 15.7%. And then in late 2008, there was a 46-day rally that took the market up by almost 25%.

But even those big, violent moves to the upside were taken away just a few short days or weeks later. When you start seeing the markets making lower highs and lower lows, that tells you that most likely any rally we’re seeing in the market is just that, a bear market rally. It’s much like what we were witnessing during the Great Recession.

What Are the Signs of the End of a Bear Market?

Bud Kasper: Yeah. There were 10 of those. I was thinking, “What if you put $10,000 in every one of those declines?” Well, first, you don’t know when they’re stopping. So, you can’t time it from that perspective. But I think it’s incredibly important for people to start thinking about this. As I said, everybody wants to feel good about the head fakes. You’re thinking it’s over. There was some pain, but you lived through it. Things are looking better again and you think you are pretty well-positioned. You’ve been defensive during this recent downturn, but when is that downturn going to end? We don’t know.

What are the signs that we’re at a bottom? Is it policy changes from the government? Is it policy changes from the Federal Reserve? Something needs to be a catalyst that makes people feel it’s enough.

Dean Barber: What happened back in 2008 has kind of set the precedent for where we are today. That was like a playbook for what occurred in March 2020. It was the great stimulus package, the zero interest rate policy, Operation Twist. The government had to get very creative with how they were doing all those things. Because you had General Motors declaring bankruptcy. You had Lehman Brothers going away into the night. You had AIG on the verge of collapse. We could go on and on with the companies that were over-leveraged to a point where this collapse basically was threatening to destroy the entire financial system.

Bud Kasper: I agree. I still get chills when I think about how incredibly historical those moves were and how they damaged so many lives in the process.

Stress Testing Your Financial Plan Through Periods Like the Great Recession and Dot-Com Bubble

Dean Barber: The thing is that those financial policies have not yet been unwound. That’s where a lot of the concern comes in today. Then, you add the trillions of extra dollars to the economy back in 2020 that has spurred this massive inflation that we haven’t seen in 40 years. It’s hurting people. It’s hurting people at a time when the markets aren’t doing very well either and interest rates are threatening to increase.

People need to understand how to navigate through this. There’s only one real way to do it, and that is to create a financial plan. With that financial plan, you stress test it through periods like the Dot-Com Bubble and Great Recession. See what the pain was there and if you could continue doing what you want to do. If you can’t, what adjustments can be made so that that could happen?

Bud Kasper: The thing is that we go through these cycles. Nobody should be really surprised by all this. It’s the degree of the bear market that worries people the most.

Dean Barber: It’s because they don’t know when it’s going to end.

Bud Kasper: Right. If you didn’t put in your plan that a bear market could occur, then yeah, you’re scared right now with what’s going if you’re retired.

Times Like These Are When You Really Need Our Retirement Plan Checklist

Dean Barber: Think about the Retirement Plan Checklist that we have. One of the questions on it asks, “Does your financial plan take into consideration that a bear market could occur at any time?” And how do you do that? Well, first, you need the program that will allow you to do that.

Bud Kasper: Yeah. Simulate.

Dean Barber: Right. It’s not that complicated when you’re sitting in our position because we do it every day. The clients that we’ve been working with for decades now know that we’re stress testing their plans through those types of market conditions all the time.

You basically take what you have today with all your resources and your spending goals are going to be in the future. And you look at taxes, Social Security, and inflation, and factor it all in along with all other sources of income. Then you ask yourself, “Based on what I have today in the positions that I hold, if I wanted to get X-amount of income starting at retirement—for example, let’s say you’re 58 and want to retire at 65—does this work? What are the chances that this works?”

You can do a historical audit straight through those bear market cycles. What was the end result? What was the value of your portfolio at the lowest point? Could you handle that type of pain? Was there a better way to live through the 2008 financial crisis? Or what about the Dot-Com Bubble that took the NASDAQ composite down by 79% over about a three-year period?

Now Isn’t the Time to Sit and Do Nothing

Bud Kasper: The two worst periods were the Great Depression and Great Recession. Is this period going to eclipse those? I don’t think so. But we can vet through that timeframe. There are tools that can give you the sense of reality if we had worse conditions than what we have now.

I’m not panicking or anything like that. Never, never. We can plan through these upsets that we have in our lives and manage through them. But if you don’t have control of all the factors that you need to understand to predict your outcome, then you’re probably worried.

Dean Barber: Don’t just sit there and guess. Don’t just wonder if it’s going to be OK or bury your head in the sand and hope that it’s going to be all right. If you haven’t built a financial plan yet, build one and stress test it through times like the Great Recession and Dot-Com Bubble to see how your plan would hold up.

And if adjustments need to be made, a CERTIFIED FINANCIAL PLANNER™ Professional can say, “If you did these few things, that might put you in a much better situation.” I don’t know what your situation is, nor do our CERTIFIED FINANCIAL PLANNER™ Professionals, but we can find out if you reach out to us.

The NASDAQ’s Dot-Com Bubble Tumble

I want to go back to the Dot-Com Bubble because it was the worst bear market that Bud and I have ever seen. That wasn’t because of the S&P 500, but rather the tech-heavy NASDAQ. During the Dot-Com Bubble, the NASDAQ tumbled 79.1%.

Bud Kasper: Incredible, isn’t it?

The Bear Market Rallies During the Dot-Com Bubble

Dean Barber: It was a 79% peak-to-trough drop that started in March 2000 and ended in March 2003. The interesting thing is that there were four major bear market rallies during that three-year period. The first one saw the NASDAQ from its bottom to its top go up by 42%. That was a huge kind of rip-your-face-off type of a bear market rally where people could have been thinking, “Oh my gosh. This thing only lasted a few months. And now here we are, up 42%. I’m missing it. I need to get more money in there.”

And then, suddenly, the bottom falls out again. Then a few months later there was a 28% rally. And then the bottom falls out again. Then there was a 41% rally a few months later. And then the bottom falls out again. Then there was a 51% rally before the final washout came. That 51% rally occurred from September 2001 through January 2002. And then 2002 was the very worst year of all during that whole bear market.

Keeping Your Emotions in Check, Especially with Your Investments

Bud Kasper: Yeah. If that scares our people, it should because that was a very difficult time. A lot of times when we’re talking about these down periods, we ask how we got to the beginning of the recession or the downturn of the market. Well, we had five consecutive years of double-digit returns. People accepted the life-changing technology that developed with open arms. It was significant.

The only problem was that people got overly excited. They started putting more money into technology. Look the P/E ratios, which are the relationship between a company’s earnings and the company’s price. Typically, anything between, let’s say, 17 on the low side, 22-23 on the high side is kind of a comfort zone with price-to-earnings ratios.

We look for the Goldilocks thing that would say, “That feels about right.” But when you start to see that the multiples were 32 or 35, it simply says that it’s way overvalued. It can’t sustain itself at those levels. There will be a price to pay. That’s what the Dot-Com Bubble was for three consecutive years with a cumulative loss of 46.5%.

The Difference Between Today and the Dot-Com Bubble

Dean Barber: And that 46.5% was in the S&P 500. The NASDAQ was far worse than that with 79.1% loss. The thing was that was different then was that we entered the early 2000s with interest rates that were relatively high compared to where they are today. People were making double-digit returns in bonds in 2000, 2001, and 2002 because we had a falling interest rate environment through that bear market.

That’s different than today, where we have a stock market that’s falling and interest rates that are rising. Now, bonds are losing money because of rising interest rates and stocks are falling because of the fear of inflation, higher interest rates, and a slowing economy.

The Fed’s Tight Rope Walk Continues

You kind of have a double-edged sword right now. I think what we’re seeing here is not like the Dot-Com Bubble, but more like the Great Recession. We already have interest rates that are low. They need to go up. Inflation is something that we haven’t had to deal with for Bud and I’s whole careers. I’ve been doing this for 35 years and he’s been doing this for 38 years. You need to go all the way back to the late 1970s and early 1980s when Paul Volcker jacked rates up through the moon and caused a recession.

Well, guess what the Fed is threatening to do now? They’re not going to go as far as they did back in the late 1970s and early 1980s with rates. But even if they achieve a 3% to 3.5% Fed funds rate by the end of this year, that threatens to put the economy into a recession in 2023.

Bud Kasper: Which means what? It pays to have a conversation with us and put this into alignment.

Sharing Some Sobering Thoughts from Scott Minerd

Dean Barber: We have a little backup as well. This is not just Bud and I talking about bear markets and bear market rallies. I want to quote a gentleman that should be widely known in our industry. On May 19, Scott Minerd of Guggenheim Partners said that investors should prepare for a summer of pain that looks a lot like the Dot-Com Bubble.

He expects that the S&P 500 could tumble as much as 45% from its January peak this summer. Even worse, he argues that the tech-heavy NASDAQ could eventually plunge by 75% from its November 2021 high, as tech stocks are priced for a new era of Fed policy.

Here’s his quote, “That looks a lot like the collapse of the internet bubble. There is no market put and I think we’re waking up to that fact now.”

Remember when we were talking earlier about the Fed policy during the Great Recession and that has not been unwound yet. In fact, it was just exacerbated again during the COVID-19 crisis. So, we have a Federal Reserve that needs to normalize interest rates. They need to shrink their balance sheet and get back to a more normal interest rate policy. They can’t just keep pumping money into the system in hopes that it’s going to buoy the stock market up. And that’s exactly what has happened.

Every time there has been any kind of a downturn, panic, or whatever, the Fed steps in. They pour tons of liquidity into the markets. Everyone thinks the Fed has our back and let anything bad happen. But what Minerd is saying here is that that Fed put option is over. Tech stocks are going to need to reprice for a new era of Fed policy.

Feeling the Sting of $5 Trillion of Stimulus

Bud Kasper: I think they can do that and their profitability will increase once things stabilize. Dean is right and Minerd is right as well. The Fed does too much. You have these incredible policy changes such as with the COVID crisis most recently with $5 trillion worth of stimulus. Seriously, $5 trillion. I can’t get my mind around that number. How in the world can anybody else understand that this was going to be the most incredibly active stimulus program ever created by the government?

Dean Barber: Well, and now we have inflation that is coming off the heels of that. And depending on which news outlet you listen to, most of the blame of inflation is being put on Vladimir Putin. They’re calling it the Putin price hikes. Well, that’s not what happened here.

Bud Kasper: No.

The Primary Cause of Inflation Isn’t Putin

Dean Barber: With Russia’s invasion of Ukraine, Putin exacerbated what was already becoming a very troublesome inflationary environment. That’s not the root of this inflation, though.

Bud Kasper: Yeah. When I think back to 2020, we were in a serious situation with COVID. We hadn’t had an event like that in such a long time, so we weren’t quite sure how the government was going to react to it. What was going to be necessary to keep the economy moving in the right direction?

We all loved the fact that they jumped in because it made no sense to me whatsoever that the market went from its high at that time of 4.91% on February 19 and dropped all the way down to 30.5%. Then, it stopped and went back up as though nothing had happened. That did not make any sense. The COVID cases weren’t even close to even 50% of what it was going to eventually be. Now, we didn’t know that at the time, but we had no encouragement that the vaccines were going to work at that time. But guess what? Money counts and when the government threw all that money back in, people said, “OK, it’s over. We’re good.”

The Fed’s Similar Action Plans During COVID and the Great Recession

Dean Barber: Basically all they did was dust off the playbook from the 2008 financial crisis and said, “Let’s do this again, only let’s make it even bigger. Let’s really put some shock and awe into this economy.” All these people had to stay at home and all these businesses shut down, so they just flooded this thing with money and hoped everything would be fine. Well, guess what? Then the economy came back and all this free money was out there. It just naturally causes inflation.

Bud Kasper: Right. When we’re going back through history, the question is if this is where we are at this point, how long will this last? Do we have another leg down in this market or two or three legs down in this market?

There’s No Crystal Ball for This Situation

Dean Barber: Yeah. We honestly don’t know. There’s no way to have a forward-looking crystal ball with this. So, you need to be prepared in case there will be another two, three, or four legs down with this bear market. Stress test your plan back through periods like the 2008 financial crisis. Take the positions that you own today, whether it’s stocks, bonds, mutual funds, ETFs, or whatever and see what your portfolio would have looked like in that timeframe. But more importantly, how would it affect your overall plan so you can do all the things you want to do?

If you’re not retired yet, how would it affect your ability to get to retirement? If you’re already retired, how would it affect your ability to continue the lifestyle you want in retirement? We can help you do that in our office or virtually so that you’re in the comfort of your own home.

Making the Necessary Adjustments to Your Plan

As you begin to build out your plan, stress test it through those timeframes so that you can see what the potential loss would be if we go through another Great Recession or Dot-Com Bubble type scenario. You need to understand it. If the results aren’t favorable, there are adjustments you can make. That’s the beautiful thing about what we do. There are always ways to get through those timeframes. Bud and I have done it now for almost 80 combined years, so we know what to do here. This isn’t a time to sit and just hope that it’s all going to work out.

Even in that 79% route of the NASDAQ back in the Dot-Com Bubble, there were some really strong bear market rallies. Again, those bear market rallies were 42%, 28%, 41% and 51%.

Bud Kasper: Yeah, it’s like an escalator. The escalator is still going down. Even as you’re taking a step up, you’re still going back down again.

Dean Barber: Yeah. The losses can be catastrophic, but you don’t have to let them be catastrophic. There are ways to protect in this time.

Bud Kasper: Right. How many people have been told to buy and hold, not make alterations to the portfolio, and that it will work out in the long run? Well, I’m sorry, that rule doesn’t work, especially for retirees. You need to protect your purchasing power. And if your purchasing power is being eroded because of market conditions, then shame on you. You should know better as well.

Looking Back on an Incredible Bull Run

Dean Barber: Well, you need to start to think differently in times like this. Really since the end of the Great Recession, we’ve had an incredible bull run outside of a few hiccups here and there. The fourth quarter of 2018 and first quarter of 2020 were rough. But by and large, those were short-lived periods. And every time that things started to look goofy, the Fed has stepped in and created more easy money by printing more money. But right now the Fed is attempting to stop this runaway inflation by raising interest rates and by shrinking the balance sheet. That is not going to be favorable to the markets.

Bud Kasper: No, and that’s exactly what the Fed Reserve needs. It needs to normalize itself and pull itself out of the picture. Let the economy do what it’s capable of doing.

It’s All About Clarity, Confidence, and Control

Dean Barber: Right. And kudos to Bud. He said late last year that the Fed should start raising rates rather than waiting until early this year. What’s the end going to look like here? We don’t know, but we do know that if you can stress test your current situation through all kinds of market cycles, so you can have clarity, confidence, and control.

When Will a Recession Occur?

As we keep discussing the history of bear markets and bear market rallies, let’s circle to the insight shared by Scott Minerd from Guggenheim. He sees something more along the lines of the tech bubble, where the S&P 500 could fall as much as 45% from its peak in January and that the NASDAQ could fall as much as 74% from its peak back in 2021. Here’s another quote from him, “As the Fed tightens into a downturn, investors will want to know when a recession will occur. It could be as early as the second half of next year.”

Like Bud said, Minerd argues that the Fed was late to raise interest rates take the proverbial punch bowl away from the markets leading to asset bubbles, forming in sectors like tech and crypto. Now though, the CIO sees the Fed’s aggressive approach as a form of over tightening. With the passage of time, if the Fed continues to hike, we will likely find ourselves experiencing the effects of increasingly restrictive monetary policy. Well before it reaches this terminal rate, the Fed will increase the risk of overshooting, causing a financial accident and starting a recession.

Going Back to the Fundamentals of the Economy

Bud Kasper: I think that is a possibility. People are often pollyannish in their attitudes. They think the Federal Reserve will do their magic and the market will be back on track for another rally so this will be over soon. As we discussed earlier with the Dot-Com Bubble and Great Recession, it’s certainly possible that we get some bull market rallies within a secular bear market.

I think we will go into a recession, but the extent of it is unknown. Recessions aren’t always such a horrible situation that it’s going to cause more pain for every citizen of the United States. There is one fortunate thing and that is our current job creation. We have an abundance of people that could go back to work, but don’t for some reason. We haven’t gone back and corrected some of the things that are fundamental to our economy succeeding, such as the supply chain.

One Reason Why the Supply Chain Is Still Struggling

And then, look at the situation over in China. They’re not using COVID vaccines and are simply doing isolations, so those people can’t go to work to put product into the boats and ship it to various countries, including the USA. Therefore, that is a supply chain dilemma, which is bogging down the economy.

The Fed’s Fight Against Inflation

Dean Barber: There’s no question about that. Let’s look at something else that’s causing the Fed to do what they’re doing as well. That’s inflation. If you’re in the top 10% of income earners or the top 10% of the wealthiest Americans out there, the inflation really doesn’t matter to you. It’s not changing your day-to-day lives.

If you’re in the next 40%, you’re probably doing OK. You might have some minor effects of the inflation that may cause you to not be able to do some of the discretionary spending that you would normally do. But inflation is hurting everyone else in a severe way. That will slow consumer spending, but I don’t think that slowing in consumer spending will cause the prices to start coming down because of what Bud just talked about and because of what is going on with Russia and Ukraine.

Could We Soon See Stagflation?

There are still things out there that are going to cause prices to continue to go up. This could very well be a period that mirrors the late 1970s and early 1980s, where you have a stagnating economy and runaway inflation.

Bud Kasper: I knew Dean was going in that direction and that is a fear. And it’s a legitimate one. The thing is that we don’t want you to be worried. We want you to be aware. There are things that you can do like working with a financial planner who can review your unique situation. A financial professional can help you see if there are some things that can be brought to light that would give you a little bit more comfort in a situation that seems unknown right now.

Dean Barber: Once you’re working with a financial advisor and creating a plan, you can begin stress testing that plan in different market conditions that we’ve experienced. For example, you can find out what would’ve happened to you during the Dot-Com Bubble if you were in the position you are today.

Buy, Hold, and Hope Isn’t an Ideal Strategy

That way you can see the results. And if the results aren’t what you want to see, then you can talk to the financial planner about how to fix it. How do you make it so that you’re going to be OK through those timeframes? I worked with people who retired right before Dot-Com Bubble, and they’re still retired today. They also have more money than they had when they retired. It’s the same story with people I worked with who retired right before the Great Recession. So, you don’t have to sit on your hands and do the whole buy, hold, and hope strategy because hope isn’t really a strategy.

You need to be proactive. There are financial planning strategies that you can do, but they’re going to be different for each of you. They can range from minimizing your taxes through creating a forward-looking tax strategy, maximizing your Social Security, or changing your asset allocation to be more favorable for the types of environments that we’re in. There are multiple things that can be done. It’s not all about investments. It’s about making sure that you’re protected through different market cycles like what we’re in here.

Should You Change What You’re Doing?

Bud Kasper: One of the questions to ask yourself right now should be, “Should I change what I’m doing?” Well, maybe you should. But a financial planner won’t know that until they get the facts and vet it through proper financial planning to illustrate what your plan’s probability of success will be in six months, 12 months, or whatever the case may be.

Dean Barber: This is especially critical for anybody that’s planning to retire within the next five years or who is already retired. This is the time of your life where one mistake can have devastating consequences to your financial security.

Bud Kasper: No doubt about it. If you’re sitting in the same position that you were a year ago, you better wake up. Because there are issues that you need to be facing.

Dean Barber: There’s one final thing I want to touch on. Bud had an annuity wholesaler call him last week. Tell that story, Bud.

Seeing Inflation’s Impact

Bud Kasper: He said, “Hey, we’ve got a great annuity. It’s fixed 3%.” I said 3% is a nice number these days with interest rates where they are, but interest rates are going up. But that wasn’t the issue. I asked him how long he’d be locked in at 3%. He said five years. Well, how is he going to beat inflation? He didn’t have any response to it.

Dean Barber: You’re not going to beat it in that situation. So not only do you have to beat inflation to keep your purchasing power where it was yesterday, last year, or two years ago. You need got to get a return on top of that to get the income that you need.

Bud Kasper: And what about taxation?

Find Out What a Financial Plan to Do for You

Dean Barber: There’s all that plays in. This is not a product decision time; this is a financial planning decision time. Morningstar’s white paper, Alpha, Beta, and Now…Gamma shows that with investments being agnostic, proper financial planning techniques can increase the income that you have by as much as 27%. That’s a big deal.

So, there’s a lot more to what we do here than focus on investments. Investments are a piece of it, but it’s all about the financial plan. You can see what a difference a forward-looking financial plan can do for you by scheduling a 20-minute “Ask Anything” Session or complimentary consultation with one of our CERTIFIED FINANCIAL PLANNER™ Professionals. We can meet with you in person or we can meet with you virtually or over the phone so you can stay in the comfort of your own home.

Thanks for joining us on America’s Wealth Management Show. I’m Dean Barber, along with Bud Kasper. We’ll be back next week same time, same place. Everybody stay healthy and stay safe.


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