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Oliver’s Insights – There’s a bear in there – what drives mild versus deep bear markets

Following the slide into bear market territory (defined as a 20% or great fall) by the Australian ASX 200 index last week, the attached note takes a look at past Australian bear markets since 1900 and what determines whether a bear market is mild as opposed to long and deep.

The key points are as follows:

  • Historically, bear markets in Australian shares have seen an average fall of 33% over 18 months.
  • However, this masks a huge range. 65% of bear markets have seen gains over the 12 months following an initial 20% decline in share prices.
  • Factors involved in whether bear markets are mild or deep include whether there is a recession, whether earnings slump and whether the market was overvalued or not prior to the start of the bear market.
  • Our view remains that a recession is unlikely, that earnings growth will be soft but is not about to implode and valuations are not stretched.

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