{"id":191324,"date":"2023-06-02T11:00:00","date_gmt":"2023-06-02T15:00:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=191324"},"modified":"2023-06-02T11:08:40","modified_gmt":"2023-06-02T15:08:40","slug":"bear-with-us-an-evaluation-of-valuation-for-those-on-the-fence-about-getting-defensive","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/bear-with-us-an-evaluation-of-valuation-for-those-on-the-fence-about-getting-defensive\/","title":{"rendered":"Bear With Us: An Evaluation of Valuation for Those on the Fence About Getting Defensive"},"content":{"rendered":"\n

By Megan Miller, CFA, Harin de Silva, CFA, Ph.D. and Benjamin Adams, CFA<\/strong><\/p>\n\n\n\n

The first six months of 2022 saw a precipitous 20% drop in the S&P 500 Index<\/a>, plunging equities into their 15th bear market in the past 100 years. We\u2019re now 16 months into this bear market\u2014are investors prepared for what happens next?<\/p>\n\n\n\n

\"US<\/figure>\n\n\n\n

Figure 1 depicts U.S. bull and bear markets over the past century. We define a bear market here as a drop of at least 20% in the month-end S&P 500 Index\u2019s total-return price from its recent month-end high. Bull markets then commence from the lowest monthly closing value.<\/p>\n\n\n\n

The most meaningful drawdown in recent history occurred around the global COVID-19 pandemic in 2020. However, the reaction was short-lived, and the market recovered before the end of March. Given the monthly measurement cadence in our definition, this decline isn\u2019t reflected in our analysis.<\/p>\n\n\n\n

The last substantial drawdown we experienced resulted from the Global Financial Crisis (GFC). The GFC torpedoed us into bear-market territory (and an economic recession) that started in 2007, lasted 16 months, and saw a total cumulative loss of -51% during that period\u2014the second largest on record.<\/p>\n\n\n\n

U.S. bear markets, their durations, and their amplitudes<\/strong><\/h3>\n\n\n\n
COUNT<\/td>RECESSION TIMEFRAME<\/td>DURATION (MONTHS)<\/td>S&P 500 TR* (%)<\/td>STARTING SHILLER PE**<\/td>ENDING SHILLER PE<\/td>CHANGE IN VALUATION (%)<\/td><\/tr>
1<\/td>1929-09-30 to 1929-11-29<\/td>3<\/td>-34<\/td>29<\/td>22<\/td>-24<\/td><\/tr>
2<\/td>1930-04-30 to 1932-06-30<\/td>27<\/td>-82<\/td>24<\/td>6<\/td>-76<\/td><\/tr>
3<\/td>1932-09-30 to 1933-02-28<\/td>6<\/td>-33<\/td>8<\/td>8<\/td>-7<\/td><\/tr>
4<\/td>1934-02-28 to 1935-03-29<\/td>14<\/td>-24<\/td>13<\/td>11<\/td>-16<\/td><\/tr>
5<\/td>1937-03-31 to 1938-03-31<\/td>13<\/td>-50<\/td>21<\/td>12<\/td>-43<\/td><\/tr>
6<\/td>1939-11-30 to 1940-05-31<\/td>7<\/td>-26<\/td>16<\/td>13<\/td>-21<\/td><\/tr>
7<\/td>1940-11-29 to 1942-04-30<\/td>18<\/td>-24<\/td>14<\/td>9<\/td>-39<\/td><\/tr>
8<\/td>1946-06-28 to 1946-11-29<\/td>6<\/td>-22<\/td>15<\/td>11<\/td>-22<\/td><\/tr>
9<\/td>1962-01-31 to 1962-06-29<\/td>6<\/td>-22<\/td>21<\/td>17<\/td>-20<\/td><\/tr>
10<\/td>1968-12-31 to 1970-06-30<\/td>19<\/td>-29<\/td>21<\/td>14<\/td>-35<\/td><\/tr>
11<\/td>1973-01-31 to 1974-09-30<\/td>21<\/td>-43<\/td>18<\/td>9<\/td>-51<\/td><\/tr>
12<\/td>1987-09-30 to 1987-11-30<\/td>3<\/td>-30<\/td>16<\/td>13<\/td>-14<\/td><\/tr>
13<\/td>2000-09-29 to 2002-09-30<\/td>25<\/td>-45<\/td>39<\/td>22<\/td>-44<\/td><\/tr>
14<\/td>2007-11-30 to 2009-02-27<\/td>16<\/td>-51<\/td>26<\/td>13<\/td>-49<\/td><\/tr>
15<\/td>2022-01-31 to 2023-03-31<\/td>15<\/td>-12<\/td>35<\/td>29<\/td>-17<\/td><\/tr>
Average (all ex. 2022)<\/td>13<\/td>-37<\/td>20<\/td>13<\/td>-33<\/td><\/tr>
Median<\/td>14<\/td>-32<\/td>19<\/td>12<\/td>-30<\/td><\/tr>
Average: High starting P\/E<\/td>16<\/td>-41<\/td>27<\/td>17<\/td>-38<\/td><\/tr>
Average: Low starting P\/E<\/td>11<\/td>-29<\/td>14<\/td>11<\/td>-24<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

Sources: Allspring and NBER
*S&P 500 Total Return Index
**Shiller P\/E is an acronym for Cyclically Adjusted Price\/Earnings (CAPE) Ratio, which is calculated by dividing a company\u2019s stock price by the company\u2019s average earnings for the past 10 years, adjusted for inflation.<\/p>\n\n\n\n

From an asset allocator\u2019s perspective, a bear market has several dimensions that merit consideration in addition to the magnitude of the decline. These additional aspects include:<\/p>\n\n\n\n