COVID Stocks and the Three Bears: Historical Perspective on Bear Markets
As we are social distancing, a term that seems destined to be Merriam-Webster’s word of the year, it is easy to get swept up by gloomy economic headlines. It is a natural impulse, akin to rubbernecking on the highway. Just as rubbernecking grinds traffic to a halt, excessive worry causes us to miss the big picture.
The speed of price movements across all financial markets, equity, fixed income, currencies, commodities, etc. may be unsettling, and the sell-off is likely to produce anxiety as it conjures up visions of 2008 and even the Great Depression. But while the circumstances surrounding the current bear market are certainly unique, the nature of the downturn is not.
Three kinds of bear markets
According to research by Goldman Sachs, there are three kinds of bear markets: cyclical, structural and event-driven. It’s worth exploring each one as they tend to produce very different kinds of recessions.
Cyclical bear markets are associated with the normal fluctuation of the business cycle. If the economy gets too “hot”, the fed will raise rates to keep prices in line, resulting in a depressed outlook for...