Tudor Financial March 2020 Special Report:
Bear Markets
Professional Investment Strategies
Investing, Planning and Financial Guidance Since 1992
Serving Clients in Over 30 States
Bear Markets
Understanding is Key
Bear market, what a strange phrase. Somewhere in history, jargon masters decided to attach upward moving markets to a bull and downward moving markets to a bear. Who understands these things?

However markets are described, investment outcomes can improve with some background knowledge. Dusting off research helps us understand what markets do and effectively translate the news that impact them.

First remember: equity investors have gotten paid much more over time than savers, bond purchasers and even real estate owners. (3) There is one price that equity investors pay to get those higher returns over time: volatility. Recognize that significant wealth is built by investors over time - bondholders and bank savers are lenders .

Corrections and Bear Markets

Corrections are intra-period market down moves of 10% or more (occur virtually every year). Bear markets are intra-period down moves of 20% or more (typically occur every 6.3 years). (4)

Bear market declines ordinarily occur when economic fundamentals are deteriorating, interest rates spike or asset price imbalances exist. For the latter, think excessive real estate prices in 2006 prior to implosion from 2007-2009, and recall inflated internet stocks circa 2000. Bear market declines heal in 425 days, on average. (4)

Corrections are driven by short-term emotion to things that appear scary but are false negative factors for markets long-term. Corrections move fast, declines are relatively short and recover, on average, within 117 days. (4)

Of the two scenarios, our perception is that the recent decline of bear market magnitude has many characteristics of a correction.
Redecorating During a Tsunami
Markets were in utopia less than a month ago. February 19, 2020 marked an all-time high for the S&P 500. Within a short sixteen trading days, markets declined into a bear market. This period included a record short number of days to produce a 10% correction, before further declines ensued. In the most recent week, volatility in markets has included a string of both positive and negative daily moves exceeding 5%.

Referring back to the last quarter of 2018, markets experienced what we have labeled a bear market decline. However, that decline took nearly 90 days. (1)

While few made radical investment modifications in the fourth quarter of 2018 during those 90 (slower) days of decline, the speed of recent declines might prompt a desire to make significant investment allocation changes.

Our view is that allocation changes in periods of unusual volatility will likely lead to subpar results. We view the current wave of health and economic challenges as a tsunami - hitting hard, departing quickly and leaving a trail of economic damage. We feel there will be time to revisit allocations and risk profiles during calmer, more rational environments which will be abundant post-COVID.
Four Catalysts for Recent Declines
Flu, Oil, Panic and Valuations

Virus: This time around, the scariness of novel SARS-CoV-2 corona virus was a primary catalyst toppling equity markets from their February 19 highs. This is unusual in the context of corrections and bear markets. Historic market moving catalysts have been financial rather than health-related...markets are heartless (yes they are) and care most about the economic impact of things. Markets ask: How many industries will be affected, will there be a contraction in GDP, will interest rates drop? This is why markets have reacted so violently to this SARS corona pandemic - markets are not showing sentiment for those contracting the virus, markets are trying to quantify the economic impact of the virus.

Oil: Global oil producers are in a production war - too much of the stuff is being pumped out every day. This pushes prices down, a gift for consumers and businesses and transportation companies. Why then did markets decline dramatically on March 9th after news of a production war between OPEC and Russia? While oil is a small 3% segment of the U.S. economy, (1) the corporate entities in the industry employ millions and substantial sums are loaned to energy companies by banks and investors. Banks are at risk for these loans - if it costs more to pump oil out of the ground than the price sold, this is a recipe of financial ruin for some energy companies.

Panic: Markets overshoot on the upside, they overshoot on the downside. From our perspective, the current trajectory is an overshoot to the downside of a temporary phenomenon.

Valuations: Since late 2019, our advanced individual stock filtering process failed to find candidates for purchase. The reason? Stocks were overvalued - and we have shared that fact with readers. However, current valuations are compelling - the list of purchase candidates has blossomed, and we have taken advantage of low prices to buy the highest quality companies in the world. (2)
What Does Our Research Show?
 21%
Our advanced stock selection filters are showing that a broad basket of stocks at current levels is currently projected to grow 21% compounded for the next 3-5 years. (2)

Our Thoughts on This Moment in Time

Tudor perspective:

  • Recent declines "feel" like and have characteristics of a correction
  • Corrections typically remedy themselves relatively quickly
  • The current scenario has no closely similar historical precedent, so markets are unable to adequately measure economic consequence. As a result, beware of experts or doomsayers that "know" exactly how resolution will occur
  • Financial institutions are very solid at the moment, unlike the Great Bear Market of 2007-2009
  • Cash and bonds are extraordinarily overvalued, stocks are substantially undervalued
  • 401(k) investors are benefiting greatly due to their dollar-cost averaging approach. Their consistent fixed dollars are picking up securities at bargain prices
  • We believe patient, courageous souls will be the beneficiaries of higher than average wealth in 3-5 years
  • Historically, 15% or more market declines are followed by twelve month returns of 55%(4) Market rebounds will likely be fast and furious
Thank you to our clients for your composure during a very volatile market moment. You have been remarkably savvy and patient.
We have experienced, and our communications with you have confirmed,
how well-educated you are about all things economic and investment-related.
Enjoy the week...
Grant S. Donaldson, MS, CPA 
(1) yahoofinance.com, S&P500 historical data, Barron, Morningstar.com, Vanguard benchmark returns
(2) Information available upon request
(3) Deutsche Bank, Long Term Asset Returns Study
Past performance is not indicative of future results.  Nothing in this communication should be construed to contain a solicitation to buy or an offer to sell any security.  Some information contained in this communication has been provided by sources other than Tudor Financial, Inc., the accuracy of which is the responsibility of the provider.  Advisors affiliated with Tudor Financial are Registered Reps. of Westminster Financial Securities, Inc.,40 North Main Street, Suite 2400, Dayton, Ohio 45423, member FINRA/SIPC. If you would like a copy of our Schedule ADV Brochure, a written disclosure statement outlining our background and business practices, please contact our office.