Not All Bear Markets Are Created Equal

As I write this article the market closed with another historic day. And it was a good one – the biggest one-day percentage gain (+11.37%) for the Dow Jones Industrial Average in almost 90 years, and its largest-ever move in point terms. But the financial carnage done by the COVID-19 pandemic over the last month is undeniable.

As we enter into a bear market for the first time in over 10 years at the hands of the COVID-19 outbreak, many investors are wondering what lies ahead. History tells us that not all bear markets are created equal, and the trigger of the market sell-off can tell us a lot about what to expect.

Types of Bear Markets & Their Triggers

Structural: The result of a market player causing a systemic problem, such as over-leveraged banks or consumers.

Cyclical: A natural slowdown in economic activity after a period of growing production and profits.

Event-Driven: An unpredictable shock to the markets, such as a natural disaster or health crisis (COVID-19 pandemic).

In the past, event-driven bear markets, similar to what we are in now, don’t last as long as structural bear markets. No one knows how this one will play out. But If history is any guide, and with a little luck, maybe we’ll recover from this event quickly.