Bear markets are a natural part of market cycles, but it can be difficult to anticipate them, know how long they will last or how much they will affect stock prices. However, we can analyze the reasons and behaviors of other historic moments when rates entered a “Bear market”, which by definition is a falling market where financial asset prices fall by 20% and widespread pessimism causes negative sentiment to persist.
Black Monday (1987)
Black Monday occurred on October 19, 1987, when the U.S. stock market rates fell by about 20%. This event marked the beginning of a global stock market crash, and the so-called “Black Monday” became one of the most important days in financial history, since, by the end of October, most of the major stock rates worldwide would have fallen more than 20% as well. The cause of this massive collapse in the market was due to a trading system that began to perceive a sharp increase in risk and triggered a massive sale of securities.
It is generally believed that several events came together to create a panic atmosphere that sent the sell signal within the system and, likewise, among investors. For example, the U.S. trade deficit widened with respect to other countries. Crises, such as the Kuwait-Iran standoff that threatened to disrupt oil supplies, were also a concern among investors, and eventually the role of the media was an amplifying factor to the severity of events at the time.
While there are many theories that try to explain why this fall occurred, most people in the media agree that the mass panic caused the fall to intensify since, prior to this event, the index was already showing constant declines since October 6, 1987. However, the S&P 500 managed to recover again its level registered on October 5, prior to these events until July 1989.
The dotcom bubble, also known as the internet bubble, was a rapid increase in the valuations of new technological innovation stations, given the increase in speculative operations that strongly boosted the price of shares during the 1990s, which generated exponential growth in stock rates.
Investors were aware that in the early years these companies would have difficulty generating income, however, as the years went by, quarterly results continued to deteriorate so much that investors began to inquire about the ability of the companies to actually stay afloat, and began withdrawing capital from them, triggering a massive global sale.
A few years later, the American markets were again affected by the events of September 11, 2001, and by the end of 2002, most of the Dotcom companies had gone bankrupt. The S&P500 fell back -49.77% over a period of approximately 25 months, beginning in September 2000 and ending in the same month, but it was not until 2002 that it began a rebound that would allow it to recover these losses in 2007.
Real Estate Bubble (2008)
The collapse of the housing market, the 2008 mortgage crisis or the global financial crisis are some of the names given to the approximate 18-month period, which began in October 2007 and ended in March 2009, a period in which the S&P 500 lost 57.69% of its value and, globally, about 30%.
The events occurred continuously and left less room for banks and the US government to maneuver. By December 2007, the United States had fallen into a recession. By early July 2008, the Dow Jones stock index would trade below 11,000 units for the first time in more than two years.
On Sunday, September 7, 2008, with financial markets falling almost 20% from their October 2007 peaks, the U.S. government announced the acquisition of Fannie Mae and Freddie Mac as a result of the losses recorded by these banks given their strong exposure to the collapse of the sub-prime market.
A week later, on September 14, major investment firm Lehman Brothers recorded losses greater than the company’s value given its own overexposure to the subprime market and announced the largest bankruptcy filing in U.S. history at that time. The next day, the markets continued to plummet until March 2009, after the largest bank bailout in the country’s financial history was announced, for more than $700 billion.
Falling markets by Covid-19 (2020)
The volatility seen in the financial markets over the past 4 weeks now reflects the deep uncertainty about the near future of the world economy. Since, as we could see in China in its decision to preserve the lives of its infected citizens and prevent an increase in the spread of the virus, a period of quarantine was determined which affected different productive chains, leaving the economy of that country severely impacted.
However, at that time the spread of Covid-19 was not seen as a risk that could impact international markets, but the situation changed when it began to spread in different parts of the world and, where they have implemented different methodologies of quarantine or isolation in order to avoid a massive contagion. The measures taken by governments have had a strong impact on the markets as they will end up significantly affecting different sectors of their economy, which will end up in a recession. Thus, as of 19 February, a slight decline began in the main international stock indexes, which was triggered by a massive sale due to the strong increase in risks.
Finally, as we have seen, bear markets are a natural part of the economy, and there are many resources for international financial instruments to help the markets recover. However, it is a process that has always taken time, and we need to be patient to where the outcome of this disease will take us.