The Covid Bear Market in Historical Perspective

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The Covid Bear Market in Historical Perspective

Post by SimpleGift »

One year on from the Covid-19 bear market is perhaps a good time to put that event into historical perspective. For those invested during the 2000 Tech Crash and 2008 Financial Crisis, the Covid bear market might seem a non-event in comparison. In fact, it had fully recovered in the time span that those two bear markets were just getting started (chart below).
  • Image
    Note: Shows cumulative S&P 500 price performance, indexed to 1.00 at peak prior to bear market.
    Data sources: S&P 500 daily prices from CBOE (2000-2011) and FRED (2012-2020).

But how about compared with all bear markets in U.S. history? A recent analysis by Goldman Sachs looked at all U.S. market drops over 20% since 1835 (27 of them), and found they fell into three broad categories, based on their triggers and features:
  • • Event-Driven Bear Markets (n=5). These are triggered by one-off shocks that don't always lead to a
    domestic recession (e.g., an oil price shock, pandemic, armed conflict, or emerging markets crisis).

    • Cyclical Bear Markets (n=15). Typically a function of rising interest rates, impending recessions
    and falls in profits. These are the most common bear markets and a normal part of the economic cycle.

    • Structural Bear Markets (n=7). Triggered by structural imbalances and financial bubbles, such as
    in the Great Depression and Great Recession. There's often a price shock, such as deflation, that follows.

By these definitions, the Covid bear market was obviously an event-driven one, and its -34% overall decline was in line with the average event-driven bear market in the U.S. since 1835 (chart below).
However, from the perspective of history, the remarkable aspect of the Covid bear market was its precipitous decline and rapid recovery — reaching bottom in just 24 days and fully recovering in just over 4 months. Compared with the average event-driven bear market in U.S. history, this was unusually rapid (chart below).
  • Image
    Note: Full recovery is time span back to previous price level, in nominal terms.
    Data source: Goldman Sachs
Discussion: While the Covid bear market was certainly emotionally impactful at the time that one was living through it, it may not go down as particularly significant from a long-term historical perspective. Thoughts?
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Re: The Covid Bear Market in Historical Perspective

Post by jebmke »

Also, not a single day was nearly as dramatic as that day in October, 1987
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Re: The Covid Bear Market in Historical Perspective

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jebmke wrote: Thu Jul 22, 2021 5:36 pm Also, not a single day was nearly as dramatic as that day in October, 1987
Yes, even though the market collapse of March 2020 during the Covid crisis was extremely rapid and felt disastrous, it doesn't beat the sheer "precipitousness" of the month of October in 1987 (in green, chart below).
  • Image
    Note: Shows daily cumulative S&P 500 price performance
    over the entire month.
Interesting how these dramatic market episodes get seared into our emotional memories.
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Re: The Covid Bear Market in Historical Perspective

Post by Californiastate »

jebmke wrote: Thu Jul 22, 2021 5:36 pm Also, not a single day was nearly as dramatic as that day in October, 1987
'87 was a blip unless you constantly watched the ticker. Covid had an unknown quantity. The GFC had another unknown quantity but played out much longer. The DotCom bust was perceived to be inevitable just like the GFC. I can't remember the catalyst for Black Monday but I do remember hearing it on the car radio driving home that day.
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Re: The Covid Bear Market in Historical Perspective

Post by SimpleGift »

In researching this topic, ran across the chart below in a Wall Street Journal article, showing the fastest recoveries in U.S. bear markets since 1928. The Covid bear market recovery (in red) was by far the most rapid in modern U.S. history.
For those with access, the WSJ article article discusses a few factors behind this unusually rapid recovery, including:
  • - Stimulus from the Fed and Congress
    - Investor expectations for a strong recovery
    - The market dominance of the tech giants
No doubt, financial historians will be further analyzing the Covid bear market and recession in the years to come.
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Re: The Covid Bear Market in Historical Perspective

Post by BJJ_GUY »

Californiastate wrote: Thu Jul 22, 2021 7:06 pm
jebmke wrote: Thu Jul 22, 2021 5:36 pm Also, not a single day was nearly as dramatic as that day in October, 1987
'87 was a blip unless you constantly watched the ticker. Covid had an unknown quantity. The GFC had another unknown quantity but played out much longer. The DotCom bust was perceived to be inevitable just like the GFC. I can't remember the catalyst for Black Monday but I do remember hearing it on the car radio driving home that day.
Black Monday (Oct 1987) was driven largely by a poorly thought-out portfolio insurance strategy, where implementation and execution were negatively self-reinforcing.

Dotcom was unique from GFC in that it was relatively contained within a sector. The market was priced rich on a broad basis, but there was quite a bit of dispersion across sectors. The fact that the tech stocks were priced to lose big, was, as you said, inevitable.

GFC was a credit crisis, and Fed induced bubble in equities and real estate. GFC was definitely more broad and deep with a lot of markets that needed to be cleared (though, arguably, never really did).

COVID is clearly an event-driven scenario. Exogenous shock combined with an artificial shut-down of the economy.

Interesting to think about grouping the different scenarios though. Makes you consider many similarities and differences shared across these four, and those that predated Black Monday.
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Re: The Covid Bear Market in Historical Perspective

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Looking through Goldman Sach's list in the OP of the 27 U.S. bear markets since 1835, it's apparent that none of the other event-driven bear markets in history were triggered by a virus or disease outbreak. So, in this respect, those of us invested during the 2020 Covid bear market were living through a first in U.S. history.

This may also help explain the unprecedented behavior of the Covid bear market — i.e., the steep initial selloff in a panic over the unknown course and future impact of the virus outbreak, then the extremely rapid recovery as investors began looking past the event, once its actual fallout and consequences became more visible. Of course, the historic scale of the stimulus efforts by the Fed and U.S. Congress were essential factors in the rapid recovery as well.
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Re: The Covid Bear Market in Historical Perspective

Post by CyclingDuo »

SimpleGift wrote: Fri Jul 23, 2021 6:07 am Looking through Goldman Sach's list in the OP of the 27 U.S. bear markets since 1835, it's apparent that none of the other event-driven bear markets in history were triggered by a virus or disease outbreak. So, in this respect, those of us invested during the 2020 Covid bear market were living through a first in U.S. history.

This may also help explain the unprecedented behavior of the Covid bear market — i.e., the steep initial selloff in a panic over the unknown course and future impact of the virus outbreak, then the extremely rapid recovery as investors began looking past the event, once its actual fallout and consequences became more visible. Of course, the historic scale of the stimulus efforts by the Fed and U.S. Congress were essential factors in the rapid recovery as well.
Good stuff, SimpleGift. Global economic shut down and the historical speed at which vaccines were developed certainly differed from past mother nature events.

Going into it back in February of 2020, I found this graphic at least somewhat calming to justify riding it out and weathering the storm...

Image
https://www.cordantwealth.com/perspecti ... ronavirus/
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Re: The Covid Bear Market in Historical Perspective

Post by SimpleGift »

CyclingDuo wrote: Fri Jul 23, 2021 8:19 am Going into it back in February of 2020, I found this graphic at least somewhat calming to justify riding it out and weathering the storm...
Thank you. I just wished I'd seen and absorbed the lesson of that graphic in March 2020, when the market was losing 24% of its value in just two weeks of trading! It was a scary time.

However, looking at the regularity of disease outbreaks around the world (14 outbreaks since 1981 in your graphic), it's a good lesson to keep in mind for next time. Yes, though it's painful to think about, there's bound to be a next time after the Covid pandemic is over, when once again we'll see market meltdowns around disease outbreaks in the decades ahead.
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Re: The Covid Bear Market in Historical Perspective

Post by nigel_ht »

SimpleGift wrote: Thu Jul 22, 2021 6:19 pm
jebmke wrote: Thu Jul 22, 2021 5:36 pm Also, not a single day was nearly as dramatic as that day in October, 1987
Yes, even though the market collapse of March 2020 during the Covid crisis was extremely rapid and felt disastrous, it doesn't beat the sheer "precipitousness" of the month of October in 1987 (in green, chart below).
  • Image
    Note: Shows daily cumulative S&P 500 price performance
    over the entire month.
Interesting how these dramatic market episodes get seared into our emotional memories.
Well, we have circuit breakers because of the 1987 crash (and improved after 2010).

What was notable about March is that since 1987 it circuit breakers have only tripped once in 1997 but four times in March 2020. Two of the ten largest one day drops of the DJIA was in March.

Who knows how deep we would have fallen in March without the circuit breakers in place.

It doesn't feel like a RBD anymore unless you've triggered a circuit breaker...
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Re: The Covid Bear Market in Historical Perspective

Post by nigel_ht »

SimpleGift wrote: Fri Jul 23, 2021 10:48 am
CyclingDuo wrote: Fri Jul 23, 2021 8:19 am Going into it back in February of 2020, I found this graphic at least somewhat calming to justify riding it out and weathering the storm...
Thank you. I just wished I'd seen and absorbed the lesson of that graphic in March 2020, when the market was losing 24% of its value in just two weeks of trading! It was a scary time.

However, looking at the regularity of disease outbreaks around the world (14 outbreaks since 1981 in your graphic), it's a good lesson to keep in mind for next time. Yes, though it's painful to think about, there's bound to be a next time after the Covid pandemic is over, when once again we'll see market meltdowns around disease outbreaks in the decades ahead.
That graphic is misleading.

In none of these events did any major economy suddenly lockdown 11M people in a city (Wuhan) and establish significant travel restrictions for 57M people (15 cities in Hubei), cancel a major holiday curtailing a major sales season, and told factories to stay shut until further notice.

Just the actions of China on January 23rd ensured a massive global supply chain problem and significantly reduced sales for any company that did a lot of retail business in China.

[OT comment removed by admin LadyGeek]

I dunno, it feels like we got really lucky that the GFC didn't turn from global financial crisis into crash and Covid, as bad as it was, wasn't as bad as it could have been.
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Re: The Covid Bear Market in Historical Perspective

Post by DB2 »

I believe we would have had another financial crisis with liquidity drying up and equities taking a drawdown as large or larger than 2008 had it not been for the Fed's most aggressive actions yet...last year.
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Re: The Covid Bear Market in Historical Perspective

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The crash barely shook me. All my brain power was used up by the news, the economic impact on people (as opposed to the stock market) and anxiety from the virus itself. The prospect of maybe losing my job did add to the anxiety until I bumped up my EF.

But the stock market? I watched it fall with such a lack of emotions that I surprised myself. By the time I could have started to think "oh maybe that's not so good?" it was over.
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Re: The Covid Bear Market in Historical Perspective

Post by SocalLiving »

pasadena wrote: Fri Jul 23, 2021 8:44 pm The crash barely shook me. All my brain power was used up by the news, the economic impact on people (as opposed to the stock market) and anxiety from the virus itself. The prospect of maybe losing my job did add to the anxiety until I bumped up my EF.

But the stock market? I watched it fall with such a lack of emotions that I surprised myself. By the time I could have started to think "oh maybe that's not so good?" it was over.
I was so grateful for everything I learned here. Allowed me to focus on all the craziness around me without worrying at all about what I should be doing about investments. Did have to rebalance, which was new for me. An insane time that could have been so much more fearful if not for the boglehead principles.

OP -thanks for posting. Really interesting read.
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Re: The Covid Bear Market in Historical Perspective

Post by pasadena »

SocalLiving wrote: Fri Jul 23, 2021 9:08 pm
pasadena wrote: Fri Jul 23, 2021 8:44 pm The crash barely shook me. All my brain power was used up by the news, the economic impact on people (as opposed to the stock market) and anxiety from the virus itself. The prospect of maybe losing my job did add to the anxiety until I bumped up my EF.

But the stock market? I watched it fall with such a lack of emotions that I surprised myself. By the time I could have started to think "oh maybe that's not so good?" it was over.
I was so grateful for everything I learned here. Allowed me to focus on all the craziness around me without worrying at all about what I should be doing about investments. Did have to rebalance, which was new for me. An insane time that could have been so much more fearful if not for the boglehead principles.

OP -thanks for posting. Really interesting read.
This forum is a gold mine. I realized during the crash that my years of reading and participating had truly left their mark - staying the course was never in question in my mind. All I could think when I glanced at the stock market was "it's going to go back up sooner or later" and "man, I wish my next 401(k) contribution would come sooner".

All I did was sell some shares to beef up my EF and sleep at night again, and do a looot of TLH. That was cool. All the rebalancing opportunities let me *finally* move stocks from taxable to Roth, which I'd been wanting to do forever.
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Re: The Covid Bear Market in Historical Perspective

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I removed a comment and reply conjecturing on the source of the coronavirus. As a reminder, see: Please read before posting on coronavirus/COVID-19

Please stay focused on the investing aspects.
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Re: The Covid Bear Market in Historical Perspective

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SimpleGift wrote: Thu Jul 22, 2021 8:52 pm In researching this topic, ran across the chart below in a Wall Street Journal article, showing the fastest recoveries in U.S. bear markets since 1928. The Covid bear market recovery (in red) was by far the most rapid in modern U.S. history.
1998 was just as fast, but it technically wasn't a bear market because the market fell only 19% in six weeks in July and August, recovering by November.
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Re: The Covid Bear Market in Historical Perspective

Post by frugalecon »

Wow, great post and comments. My own thinking is that the speed and overwhelming nature of the policy response played a big role. That isn’t always guaranteed, both because the fact that we are in a crisis isn’t always as obvious at the beginning, when the policy response is most effective, and agreement among all of the relevant policy makers isn’t always as assured. Given both of these factors, I’m not sure how transferable the results of this experience will be to future economic crises accompanied by bear markets.
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Re: The Covid Bear Market in Historical Perspective

Post by CyclingDuo »

nigel_ht wrote: Fri Jul 23, 2021 11:42 am
SimpleGift wrote: Fri Jul 23, 2021 10:48 am
CyclingDuo wrote: Fri Jul 23, 2021 8:19 am Going into it back in February of 2020, I found this graphic at least somewhat calming to justify riding it out and weathering the storm...
Thank you. I just wished I'd seen and absorbed the lesson of that graphic in March 2020, when the market was losing 24% of its value in just two weeks of trading! It was a scary time.

However, looking at the regularity of disease outbreaks around the world (14 outbreaks since 1981 in your graphic), it's a good lesson to keep in mind for next time. Yes, though it's painful to think about, there's bound to be a next time after the Covid pandemic is over, when once again we'll see market meltdowns around disease outbreaks in the decades ahead.
That graphic is misleading.

In none of these events did any major economy suddenly lockdown 11M people in a city (Wuhan) and establish significant travel restrictions for 57M people (15 cities in Hubei), cancel a major holiday curtailing a major sales season, and told factories to stay shut until further notice.

Just the actions of China on January 23rd ensured a massive global supply chain problem and significantly reduced sales for any company that did a lot of retail business in China.

[OT comment removed by admin LadyGeek]

I dunno, it feels like we got really lucky that the GFC didn't turn from global financial crisis into crash and Covid, as bad as it was, wasn't as bad as it could have been.
Agree that when I read the article in late February that included the graphic while the market decline was already underway, we did not yet know the extent of the coming shutdowns on a global basis. However, let's not miss the point that the graphic depicted. The article and graphics provided plenty of traditional behavioral finance advice that fit - whether it was short lived, intermediate, or a bit longer regarding length and depth of drawdown. The article that contained the graphic clearly talked about traditional BH strategies of "time in the market, vs. timing the market", "don't pay the panic tax" by selling during a drawdown, and commentary from the article such as "The people who actually come out of this the best are the people who think about things in the context of their own plan, not in terms of trying to predict the trends.”

There was an awful lot of rail car and 18 wheeler counting going on here smack dab in the middle of what is known as Warren Buffett country, and not a thing slowed down regarding freight shipping and the flow of goods and supplies on major coast to coast arterials and rails which rather surprised a lot of us. The swift growth of the sheer amount of paneled delivery vans and trucks (and the thousands and thousands of new drivers) that followed as the economy quickly migrated to a different way of delivering goods and services to fuel consumer and business demand was also a comforting sign that economic flow continued in spite of all the locking down. Yes, it was a difficult time with every business striving to find new ways to conduct business. Every disease outbreak is different (and we are still in this one), but the stage has now been set with a modern wake up call and all of the work on the needed infrastructure for handling future disease outbreaks to keep economic activity flowing. Will that mean that future shocks may not be as severe as Covid in terms of economic shutdowns and lockdowns? Time will tell. At least masks won't be new to any of us. :beer

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Re: The Covid Bear Market in Historical Perspective

Post by nigel_ht »

CyclingDuo wrote: Sat Jul 24, 2021 9:58 pm
nigel_ht wrote: Fri Jul 23, 2021 11:42 am
SimpleGift wrote: Fri Jul 23, 2021 10:48 am
CyclingDuo wrote: Fri Jul 23, 2021 8:19 am Going into it back in February of 2020, I found this graphic at least somewhat calming to justify riding it out and weathering the storm...
Thank you. I just wished I'd seen and absorbed the lesson of that graphic in March 2020, when the market was losing 24% of its value in just two weeks of trading! It was a scary time.

However, looking at the regularity of disease outbreaks around the world (14 outbreaks since 1981 in your graphic), it's a good lesson to keep in mind for next time. Yes, though it's painful to think about, there's bound to be a next time after the Covid pandemic is over, when once again we'll see market meltdowns around disease outbreaks in the decades ahead.
That graphic is misleading.

In none of these events did any major economy suddenly lockdown 11M people in a city (Wuhan) and establish significant travel restrictions for 57M people (15 cities in Hubei), cancel a major holiday curtailing a major sales season, and told factories to stay shut until further notice.

Just the actions of China on January 23rd ensured a massive global supply chain problem and significantly reduced sales for any company that did a lot of retail business in China.

[OT comment removed by admin LadyGeek]

I dunno, it feels like we got really lucky that the GFC didn't turn from global financial crisis into crash and Covid, as bad as it was, wasn't as bad as it could have been.
Agree that when I read the article in late February that included the graphic while the market decline was already underway, we did not yet know the extent of the coming shutdowns on a global basis. However, let's not miss the point that the graphic depicted. The article and graphics provided plenty of traditional behavioral finance advice that fit - whether it was short lived, intermediate, or a bit longer regarding length and depth of drawdown.
Well, I don’t advocate panic selling but my point, without delving too deeply into pandemics, is that a repeat of the 1920 Spanish Flu would have resulted in a much larger economic impact than Covid or SARS or other more recent examples in the chart.

Now you could argue that the Spanish Flu also shows the same stock market behavior because the roaring 20s followed after that…so maybe pandemics really don’t do much to the stock market and you tend to see rapid recoveries afterwards.
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Re: The Covid Bear Market in Historical Perspective

Post by Sandtrap »

Event driven COVID vs others.
Artificial construct and manipulation vs economic/financial origins?

Financial query

Well done post.
Thanks OP

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Re: The Covid Bear Market in Historical Perspective

Post by dh »

pasadena wrote: Fri Jul 23, 2021 8:44 pm The crash barely shook me. All my brain power was used up by the news, the economic impact on people (as opposed to the stock market) and anxiety from the virus itself. The prospect of maybe losing my job did add to the anxiety until I bumped up my EF.
You stayed focused on the things that were important with a perspective on the long-run. I remember people on this board trying to talk one person not to go to cash. That person kept arguing and arguing that this it a global pandemic would ruin the market and "guaranteed" (his/her word) that the market was going to keep going down (as memory serves me, I think it was late March). I really felt for that person and hope s/he got back into the market at some point last spring, but we never saw a post after that incredibly long thread. While not everyone will follow, I so appreciate everyone here encouraging people to stay the course. You have helped me many times. Thanks, Bogleheads! :sharebeer
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Re: The Covid Bear Market in Historical Perspective

Post by CyclingDuo »

nigel_ht wrote: Sun Jul 25, 2021 11:18 amWell, I don’t advocate panic selling but my point, without delving too deeply into pandemics, is that a repeat of the 1920 Spanish Flu would have resulted in a much larger economic impact than Covid or SARS or other more recent examples in the chart.

Now you could argue that the Spanish Flu also shows the same stock market behavior because the roaring 20s followed after that…so maybe pandemics really don’t do much to the stock market and you tend to see rapid recoveries afterwards.
Hard to tell because so many of the worst pandemics came long before any US stock market was of importance, and the market barely faltered during the 1918-1920 pandemic (only up to 10% of Americans owned stock investments back then):

During the two-plus years of the Spanish flu pandemic, the Dow Jones Industrial Average was never more than 5% lower than its level on March 4, 1918, the date some have given for the start of the crisis. In November of that year, in fact, at the height of the pandemic’s second and deadliest wave, the Dow was 11% higher.

https://www.wsj.com/articles/the-stock- ... 1599480001

The 1918 to 1920 flu pandemic took somewhere between 20-50 Million lives right at the tail end of WWI. My grandfather was one of three siblings out of nine that survived it (his parents and six other siblings were lost to the flu). My grandmother lost her parents and two siblings to the flu.

The closest thing, in terms of loss of lives, that any of us has lived through is the HIV/AIDS pandemic that has taken 35 Million lives to date with 31-35 Million currently being infected and living with it.
https://www.mphonline.org/worst-pandemics-in-history/

Obviously, each pandemic or disease outbreak writes its own history along with the public and market's reaction to it.

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Re: The Covid Bear Market in Historical Perspective

Post by nigel_ht »

CyclingDuo wrote: Sun Jul 25, 2021 1:42 pm
The closest thing, in terms of loss of lives, that any of us has lived through is the HIV/AIDS pandemic that has taken 35 Million lives to date with 31-35 Million currently being infected and living with it.
https://www.mphonline.org/worst-pandemics-in-history/

CyclingDuo
HIV/AIDS was/is a long duration tragedy. I think for more market damage you need have quarantine or rapid deaths to really stop the economy from functioning.
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Re: The Covid Bear Market in Historical Perspective

Post by Dottie57 »

DB2 wrote: Fri Jul 23, 2021 8:33 pm I believe we would have had another financial crisis with liquidity drying up and equities taking a drawdown as large or larger than 2008 had it not been for the Fed's most aggressive actions yet...last year.
I agree.
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Re: The Covid Bear Market in Historical Perspective

Post by nigel_ht »

Dottie57 wrote: Sun Jul 25, 2021 2:24 pm
DB2 wrote: Fri Jul 23, 2021 8:33 pm I believe we would have had another financial crisis with liquidity drying up and equities taking a drawdown as large or larger than 2008 had it not been for the Fed's most aggressive actions yet...last year.
I agree.
Now all they need to do is manage a soft landing as they remove QE…
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Re: The Covid Bear Market in Historical Perspective

Post by DB2 »

nigel_ht wrote: Sun Jul 25, 2021 2:48 pm
Dottie57 wrote: Sun Jul 25, 2021 2:24 pm
DB2 wrote: Fri Jul 23, 2021 8:33 pm I believe we would have had another financial crisis with liquidity drying up and equities taking a drawdown as large or larger than 2008 had it not been for the Fed's most aggressive actions yet...last year.
I agree.
Now all they need to do is manage a soft landing as they remove QE…
That's the real trick isn't it? It played out rather harshly in late 2018 as they tried it under much better economic conditions.
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