Having spent some time catching up on our Gloom, Boom & Doom reports, from the honourable Marc Faber last week, one always has to ponder the bearish case. In his August report, Faber analysed the 15 largest bear markets since 1929, which makes interesting reading.
According to Faber, on average, bear markets give back 21 quarters, or little more than 5 years of previous gains. The worst, in 1929-32, gave back over 15 years of previous gains and the second worst, recently ending in 2009, gave back 12 years of previous gains. The smallest meanwhile, was in 1998, where 4 quarters of previous gains, or 20%, was given back. Rather scarily, when applied to the current bull market, the historic average of 21 quarters equates to a 52% drop. The key words here are “on average”, as there is no real pattern over the 85 years Faber analysed.
Bear markets in the US have almost always started because of either a rising interest rate environment or excessive valuation. With Janet Yellen almost agreeing to keep short term rates lower for longer and US 10 year Treasury Bonds moving even lower in yield, this is hardly a threat in the near term. Valuation is not considered cheap as it was in 2009 but is hardly bubble territory yet. However, the key here is “almost always”: the “Unknown Unknown”, or exception to the rule, is something we frequently ponder in this office.
