Investment Insights

Bad News Bear Market: No Pain, No Gain

By QS Research Group
17 March 2020

It's important for investors to maintain a long-term view on equities, with a risk/return profile they can tolerate, even in the worst of time.

The S&P 500 Index was down over 9% on March 12th, 2020. This marks the single worst down day since Black Monday (October 1987) as the market grapples to price in the uncertainty surrounding COVID-19 (Coronavirus) as well as the oil supply/demand shock due to Russia resisting OPEC’s proposed supply cut. As of March 12th, 2020, the US market cap-weighted index was down over 26%, officially in bear market territory, and the VIX (Volatility Index) spiked at over 75, elevated significantly from the sub-15 levels realised at the beginning of last year and throughout much of 2019.

Year to date we have seen low volatility, dividend-oriented sectors such as Utilities, Real Estate and Consumer Staples hold up the best (highlighted in blue below), while sectors traditionally considered as cyclical and value-oriented, such as Energy and Financials, have sold off significantly, down over 51% and 34% respectively.

Performance Year to Date and During Peak to Trough Drawdown

Source: Bloomberg, S&P 500 GICS Sector Returns, as of March 12, 2020. *Peak to trough drawdown period from 2/19/20 through 3/12/20. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

While a 9% drop on a given day is difficult for any investor to stomach, it is important to remember that corrections and bear markets happen relatively often. From 1980 – 2019 there were 13 S&P 500 market corrections, defined as a peak to trough move of 10% or greater and seven bear markets, defined as a peak to trough move of 20% or greater. Despite being in an 11-year bull market, that means on average there has been one attention-grabbing downturn every two years.

It is important for investors to maintain a long-term view and an equity portfolio with a risk/return profile they can tolerate, especially in the worst of times. Historically, equity markets have delivered strong returns right after a market bottom.

Loss aversion may push investors to stay on the sidelines which may lead to missing out on gains. Timing markets is a difficult task even for the most seasoned investors, and investors lucky enough to avoid drawdowns may fail to benefit from rebounds. For example, following the aforementioned March 12th decline, the S&P 500 Index spiked over 9% on Friday March 13th, representing the largest one-day rally since 2008 (during the financial crisis). Missing just ten of the best trading days over the last ten years would have reduced returns over this period by over two-fold. Missing 20 of the best trading days over this ten-year holding period would have resulted in a near-flat return. We view a long-term, diversified and strategic mindset as the bedrock of investment strategy.

The Risk of Missing Out

10-Year Annualised Rate of Return

Source: Bloomberg, S&P 500 Index, as of March 13, 2020. Past performance is no guarantee of future results. Indexes are unmanaged, and not available for direct investment. Index returns do not include fees or sales charges. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment

Equities continue to be an integral component of investment portfolios, particularly as rates move lower and income from bonds is likely to be squeezed.  However, the true benefit of the asset class is only realised when investors are able to stay the course. As such, it is important for investors to look at reducing their overall beta to the market through diversifying into under-exposed market-cap weighted sectors such as Utilities, Consumer Staples and Real Estate which not only diversify total return streams through the income they provide but also allow for exposure to the low volatility factor which has shown historical strength amidst periods of heightened market volatility as well as collapsing rates. When considering a lower volatility strategy in this environment, investors should look for exposure to the dividend factor as well as a consideration for underlying fundamentals, favoring those high-conviction non-cyclicals that have the earnings power to support their dividend payouts.




Beta measures the sensitivity of an investment to the movement of its benchmark.  A beta higher than 1.0 indicates the investment has been more volatile than the benchmark and a beta of less than 1.0 indicates that the investment has been less volatile than the benchmark.
Black Monday on October 19, 1987 was the date when a sudden, severe and largely unexpected systemic shock impaired the functioning of the global financial market system, roiling its stability through a stock market crash, along with crashes in the futures and options markets.
Capitalisation-weighted refers to an approach where individual components of an index or asset class are weighted according to their market capitalisation, so that larger components carry a larger percentage weighting. Market capitalisation is the total dollar market value of all of a company's outstanding shares; it is calculated by multiplying a company's shares outstanding by the current market price of one share.
The Chicago Board Options Exchange (CBOE) Volatility Index (VIX) is a measure of market expectations of near-term volatility as conveyed by S&P 500 stock index option prices.
COVID-19 is the World Health Organisation's official designation of the current coronavirus.
The Global Industry Classification Standard (GICS) is a standardised classification system for equities, developed jointly by Morgan Stanley Capital International (MSCI) and Standard & Poors.
The Organisation of the Petroleum Exporting Countries (OPEC) is a permanent intergovernmental organisation of 12 oil-exporting developing nations that coordinates and unifies the petroleum policies of its member countries.
The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S.

  • Forecasts are inherently limited and should not be relied upon as indicators of actual or future performance.

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