As the stock market goes towards zero with huge fluctuations every day, many friends ask me: When will the market bottom out? And how far will it go? Then how long will recovery take?

In light of these conversations I want to put out my own analysis and hypothesis — but as with all things, it's your money, and this isn't financial advice.

In a nutshell... my hypothesis is that

Note: You can't be sure of any of the above.

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About Me in Finance

I've written a lot on this blog about tech operations, coding, and motorcycles. So why should you listen to anything I say about the world of finance?

Firstly, don't listen to ANYONE about finance. Nearly everyone is trying to sell you something. I don't believe there's such thing as an "independent financial adviser".

Secondly, the following is opinion only. I'd take it with a grain of salt and just lob it in with every other bit of opinion there is out there, and form your own. Only invest what you can stomach going down by 50%.

But finally... I've been investing and trading since 2012, and have learned a thing or two along the way.

I've traded mostly tech stocks, equity indexes, and stock market futures, using my own money and later family money.

From 2012-14 I was the COO of Hong Kong-based private family office and asset management firm named Unity Asset Management, which managed a portfolio of $1B at its peak. In that time, while I wasn't making equity decisions and was just responsible for efficient back operations, I learned a lot about investment and trading from observation and conversations with many highly erudite individuals.

I've traded using a number of styles, including

  • Algorithmic small-cap trading (using Portfolio123)
  • Short-term futures trading
  • Index buy and hold
  • Equities "BTFD*" (and hold)

The last two are the only strategies I still use. I buy cheap, then hold.

* BTFD = Buy The Fucking Dip. It's a trading term.

How far down will the stock market go? Probably 40-60% from its peak... maybe.

Firstly, let's address this question. How far down will the market go due to the coronavirus pandemic? Probably about 40-60%.

Why do I think this? History.

Let's look at a history of the Dow Jones since... forever.

History of Dow Jones Index and all market crashes and recovery
History of all market crashes and recoveries in the Dow Jones

The market crashes periodically. In 1929, it crashed dramatically, losing the lion's share of its value.

But it recovered. That recovery took a whopping 25 years — but it was an unprecedented crash, and it was early days for the market. Plus, a war happened.

The market has recovered from every single crash ever. And for the foreseeable future it will keep doing it.

Is the market overvalued in 2020?

People — magazines, prominent investors — say the market is overvalued al the time. So much so that i went looking for a quote, and just googled "market is overvalued 2015" and found too many to reasonably mention here.

People say: The market is over-valued. It's due for a correction.

This is true, but the thing is: it's always true.

People have been saying this since the market reached new all-time-highs in the mid 2010s. You only need to look at a number of ratios, including P/E or even adjusted P/E to conclude — yes, the market was massively overvalued due to prior periods and was ripe for a correction.

One of the community favourites is Shiller P/E. It's the same as P/E, but adjusted for market cycles. Here's an explanation of Shiller P/E on Investopedia.

But why P/E doesn't work, in a nutshell:

  • The highest peak for the regular P/E was 123 in Q1 2009.
  • By then the S&P 500 had crashed more than 50% from its peak in 2007.
  • The P/E was high because earnings were depressed. So even with P/E at 123, much higher than the historical mean of 15, counter-intuitively it was the best time in recent history to buy stocks.
  • On the other hand, the Shiller P/E was at 13.3, its lowest level in decades, correctly indicating a better time to buy stocks.

Looking at historical Shiller P/E, we're over the historical average of 17 right now:

Shiller P/E (or CAPE) since the Dow Jones Industrial Index was first a thing
Historic Shiller P/E (CAPE)

So even with prices at 20-30% below their peak in January 2020, we're still just AT the historical average of 17. We're just approaching the 10-year average of 19.

The thing is — it's easy to say a market will go down. It's hard (or impossible, other than at least with an element of luck) to say when the market will go down and by how much.

This is why many investment experts say "timing the market" is impossible, and the wisest thing to do is just continually invest over a long period of time.

Do you know what investing for the long run but listening to market news everyday is like? It's like a man walking up a big hill with a yo-yo and keeping his eyes fixed on the yo-yo instead of the hill. - Alan Abelson, former editor of Barron's
"We continue to make more money when snoring than when active." - Warren Buffet, legendary investor

How long will the crash take to get to bottom? And how far will it go?

This is the killer question — just how far will the draw-down go during the coronavirus pandemic?

People look at all kinds of things like

  • Airlines and travel companies failing
  • Unemployment levels
  • Debt levels
  • Oil prices
  • Interest rates
  • Infection and mortality rates

The thing is... all of those look bad, but they don't point to the effect on the market. The market is a weird animal and it behaves in a somewhat unpredictable way.

That's why every day you see headlines like the following, using words like "despite" something that has happened, or "in hopes of" something that hasn't happened:

Wall street journal headline - US Stocks fall "despite" something
Wall Street Journal - Stocks drop "despite"
Financial times headline - stocks rise "on hopes of"
Financial Times — Stocks rise "on hopes of" something

Reporters writing about daily stock price movements have no idea what causes stock prices and falls. They know what the context is, but there's no single causal effect.

One way of looking estimating the size of the current crash is to examine the largest crashes of the 80 or so past years — excluding the one leading to the Great Depression. It is possible it'd re-occur, but it hasn't in a while, and the world is more stable now, so odds are off (but — not totally off).

Examine the following chart of market crashes/corrections since the 1940s, in order from the size of correction (large to small)

Chart of time to bottom and time to recovery of corrections since 1940, ordered by size of correction
Chart of time to bottom and time to recovery of corrections since 1940, ordered by size of correction

Large corrections take a while to bottom out because of spiral effects — one thing leads to another. (And conversely, those chain effects lead to large corrections.)

Those who were paying attention during the 2007-2009 Global Financial Crisis will remember a string of events like

  • April 2007: The first REIT specialising in sub-prime mortgages filed for bankruptcy — launching the sub-prime crisis
  • Sep 2007: The LIBOR suddenly diverged, causing many people to Google "What's a LIBOR"
  • Oct 2007: The DJIA hit its peak of 14,154... which it wouldn't see again for a while, but nobody knew that. Market started dropping fast.
  • Mar 2008: The Fed guaranteed Bear Stearns' bad loans so JP Morgan Chase could acquire it.
  • Sep 2008: Federal government took over Fannie Mae and Freddie Mac
  • Still sep 2008: Lehamn Brothers went bankrupt!
  • And still Sep 2008 (big month): Federal Reserve took over AIG
  • AND STILL Sep 2008: Goldman Stacks and Morgan Stanley converted themselves from Investment Banks to bank holding companies, to get more Federal Reserve protection
  • Dec 2008: The federal funds rate was lowered to zero percent
  • Jan 2009: Government bailed out GM and Ford
  • Feb 2009: Congress approved a $787B stimulus package
  • March 6 2009: The Dow hit its lowest point for a decade at 6,443... 55% lower than its peak in Oct 2007.

So a chain of events that started in early 2007 with housing defaults and problems with sub-prime mortgages took over 18 months to culminate in the full extent of the crash.

How long will the recovery take? At least months... maybe years.

The important thing to realise is that it's stimulus packages that trigger recoveries. The Congress already approved a $2T stimulus package in March 2019. So are we on our way back already? It depends on what further flow-on effects happen over the next 3-12 months.

Looking at the above chart (and the analysis of other financial journalists), the market takes on average 300 days to reach a bear market, and over 600 days to recover.

There is no "rule". Generally, markets take a long time to crash, and even longer to recover. And both numbers generally get higher as the crash is more intense.

There's one important caveat: The current bear market took just 22 days to arrive. This was caused by central bankers and leaders realisng that the only way to contain COVID-19 is to depress the economy. This is the fastest bear market in history. The recovery may be swift as well.

Probably the most important take-away from this whole article is that you should not sell your stocks now.

Investors are very good at making losses when the pain becomes unbearable and missing the subsequent upswing. If you reduce exposure when the market is 30% below its peak, it's not a timely move. This is especially the case when the reason for the market's fall (a virus), and the path towards its recovery (containment and cures) are understood.

Will the market go to zero?

The market won't go to zero. It can't go to zero. To go to zero, you'd be saying "Everything is worthless. Nothing has value." That's obviously not true — companies have assets and they can be sold. For a market to go to zero, you'd need an entire financial system collapse and hyperinflation, like we've seen in Venezuela.

Economic collapses only occur because of corrupt governments that hold all power and just want to keep money for themselves. That won't happen in Europe. It probably won't happen in the US, or even in China.

So that said — the best advice is to start buying in, assuming the market will keep dropping but also assuming it might not.