Our overview of the current bear market

2022 has been one of the toughest years for equity investors in many years with the S&P 500 Index, Nasdaq Composite Index and Dow Jones Industrial Average Index all ending the third quarter in bear market territory. 2022 has so far been an unusual year with the S&P 500 Index recording 106 negative trading sessions, which was over 56% of all trading days. The long-term average of negative trading days in a year is 46%. Furthermore, as of the end of the quarter, 86% of companies in the S&P 500 are trading lower than at the start of the year. Typically years with high number of negative trading days and negative returns are followed by years with positive returns.

In Australia, given the high index weight of mining and energy companies, and the strong performance of those companies, the S&P/ASX 300 Index has performed much better than global peers, down only 10% in 2022. BHP the largest mining company, commanding an index weight of 10% has out-performed the market by almost 20% this year. It is not unusual to see BHP and other mining companies out-perform in the early stages of a downturn, to then under-perform in the 2nd half of the bear market. We saw this occur during previous downturns in 2015, 2011and during the Global Financial Crisis.

Since 1928 the S&P 500 Index has experienced 22 bear markets (defined as a decrease of 20% or more after a peak from an increase of 20% or more). On average, a bear market has lasted approximately one year, and declined 37%. However, given the variance in the duration and severity of bear markets, these average statistics are not a useful guide for investors. However, the sharp and strong recovery after a bear market is ̶ on average, the market recovers 13% one month after a trough, and 43% 12 months after. In our view, this poses a great risk for investors who try to time the market. If an investor is not invested in the early stages of a recovery, then they risk missing the strongest part of the cycle. Our approach therefore is to remain invested in high quality, sustainable growth companies that are also solving many of the world’s biggest problems.

This note has been prepared by ELM Responsible Investments (‘ELMRI’) ABN 70 607 177 711 AFSL 520428, for Australian wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth).

The information is not intended for general distribution or publication and must be retained in a confidential manner. Information contained herein consists of confidential proprietary information constituting the sole property of ELMRI and its investment activities; its use is restricted accordingly.

This note is for general informational purposes only and does not purport to be comprehensive or to give advice. The views expressed are the views of the writer at the time of preparation and presenting and all forecasts, assumptions, opinions, data and other information are not warranted as to accuracy or completeness and are subject to change without notice. This is not an offer document and does not constitute an offer or invitation of investment recommendation to distribute or purchase securities, shares, units or other interests to enter into an investment agreement. No person should rely on the content and/or act on the basis of any material contained in this note. Any potential investor should consider their own circumstances and seek professional advice.

ELMRI funds, its directors, employees, representatives and associates may have an interest in the named securities.

Past performance is for illustrative purposes only and is not indicative of future performance.