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ETF Core Strategies

Aim: To trend-trade general equity ETFs so as to ride rallies and buck busts in the Australian share market.

ETF Rotation Strategies

Aim: To back the local and foreign sector ETFs with the strongest price gains over both short and long terms.

How long do bear markets last?

A bear market is a prolonged period of falling share prices as measured by a general market price index such as the Australian All Ordinaries index. Bear markets can be graded by their duration; secular, primary or secondary.

A secular bear market lasts 5 to 25 years and consists of a series of sequential primary bear markets that last for a year or more. Secondary bear markets last less than a year, taking normally a few weeks to a few months.

Secular Bear Markets

No one knows whether the secular bear market that started in America in 2000 is finally over or whether it has further to run because the structural imbalances that caused the 2008 global financial crisis (GFC) could take many years to resolve.

But what we do know is that for the last three centuries share markets fluctuated sideways within a horizontal channel almost half the time. An emerging belief that market cycles had finally been replaced by stable growth was rudely overturned by the GFC.

The following chart shows America’s S&P 500 share index since 1870 adjusted for price inflation and marks in red those periods when share prices in real terms were depressed. Note how long these secular bear markets persisted.

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Those who invested long-term in 1929 were trapped for 27 years before they broke even in real terms in 1956.

After 1966 the market fell for a long period before restoring its former real value in 1990.

Australia historically had a similar experience to America except that the absence of a large IT industry combined with strong commodity prices meant our share market had only a mild correction in 2000 and then resumed booming until late 2007 when it crashed in synch with America.

For Americans the real decline of their share market since 2000 has been particularly severe and based on past experience may take a long time to recover its real capital loss.

Japan’s secular bear market started in 1990 when the Nikkei share index peaked near 40,000. In March 2009 it had sunk to 7,300; over 80% below its peak value of almost 20 years earlier.

Yet during this period Japan never experienced a great depression, only a series of recessions. This demonstrates that it does not require an economic downturn of the severity of the 1930s to decimate a share market in a developed economy.

During its secular bear market Japan has experienced many cyclical bear market rallies with stock price rises of between 20% and 200%. Anyone accurately timing the Japanese share market would have sidestepped the crashes and ridden the rallies thereby avoiding the destruction of share value recorded over the whole period. Indeed they would have profited handsomely notwithstanding the market's downward swings.

Nikkei Index (Japan Stock Market), 1989 – 2010

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Primary and Secondary Bear Markets

Bear markets represent either corrections or crashes after a market has peaked. A correction is when a share market index falls by more than 10% from peak to trough while a crash is a fall in excess of 20%. The following table shows serious Australian share market crashes since 1960. There have been fifteen in all – about one every three and a half years.

Australian Bear Markets, 1960 –2010

Bear Market Duration % Decline
Sep 60-Nov 60 2 months -23.2%
Feb 64-Jun 65 16 months -20.0%
Jan 70-Nov 71 22 months -39.0%
Jan 73-Sep 74 20 months -59.3%
Aug 76-Nov 76 3 months -22.0%
Feb 80-Mar 80 2 months -20.2%
Nov 80-Jul 82 20 months -40.6%
Sep 87-Nov 87 2 months -50.0%
Aug 89-Jan 91 15 months -32.4%
May 92-Nov92 6 months -20.3%
Feb 94-Feb 95 12 months -23.0%
Sep 97-Oct 97 1 month -21.0%
Mar 02-Mar 03 12 months -22.3%
Nov 07-Mar 09 16 months -54.6%
Apr 11-Sep 11 6 months -22.5%
Average 10.3 months -31.4%

On average bear markets lasted just over ten months and recorded a decline of over 31%. Their duration ranged from about 1 month (the 1997 Asian crisis) to 22 months (the Poseidon mining boom collapse). Their severity ranged from 20% (1964-65) to almost 60% (1973-74).

Conclusion

The lessons of America, Japan and our own stock market is that the prudent course of action is not to ignore market risk but to manage it by using trend following timing principles that work in either bear or bull markets. Exiting the share market shortly after it starts crashing makes it possible to buy back shares  at much lower prices. Avoiding the worst of a crash is the secret to beating a ‘set and forget’ approach to share ownership. 

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