Liam Dann: Bear roars as long bull market finally falls

Coronavirus has dealt a final blow to the long-running bull market. Photo / Getty Images

COMMENT:

There were times it felt like it was a golden run that would never end.

But the 11-year bull run on the local NZX-50 died yesterday as it fell more than 8 per cent, dragging the index into bear territory — off more than 20 per cent.

It didn't need to be this brutal.

It still seems bizarre that markets surged through January and February, with the NZX-50 hitting a record 12,071 points on February 21.

But history tells us that markets seldom unwind in an orderly fashion.

In fact there's been no shortage of cool market players warning of irrational exuberance, saying stocks were overvalued and arguing that we were overdue for a fall.

But a widespread acceptance that we were due for a crash has done little to prepare investors for the cold reality.

The big falls of this week have about them the surreal feel of history unfolding.

In the end, when the dust settles in the financial sector there will be few who can claim to be completely surprised.

Trader Michael Gallucci works at his post on the floor of the New York Stock Exchange. Photo / AP

It was an industry waiting for a hit.

For the past year or so there has been something of a black humour to discussions about what kind of external shock would deliver the blow. Many thought it would be the trade war.

There was a case to be made that the bull market died a natural death in the trade-war slump of late 2018.

But when the markets shrugged off the trade war it created a fresh market surge — one that would prove to be its last.

No doubt there are a few prescient fund managers who have been sitting in defensive positions — with higher than normal ratios of cash.

They'll now be ready to swoop on bargains when this thing plays out.

Others may be kicking themselves, having felt the jitters of giddy market highs too early, taking defensive positions, only to be pulled in under pressure from clients and a relentless march of the market through the last year.

Perhaps it is reassuring at times like this to look at what we've been through before.

On October 19, 1987 Wall Street plunged more than 20 per cent for reasons that have never really been well understood.

In New Zealand the local market fell 15 per cent but the longer-term damage was worse.

The collapse of heavily leveraged listed investment companies spilled over into the real economy and caused us to bounce in and out of recession for the rest of the decade.

By February 1988 the sharemarket was down 55 per cent from its pre-crash peak.

The anguish of 1987's record fall on the New Zealand sharemarket shows plainly on the faces of these three observers at the Auckland Stock Exchange. Photo / File

When it comes to the sheer destruction of investor wealth, we are currently still a long way from the 41 per cent hit the NZX-50 took in the global financial crisis — between its peak at the end of September 2007 and low point more than a year later in February 2009.

That was a protracted crisis in the heart of the financial system.

Although it didn't rival the 1987 event for a one-day crash, there were several days of large falls during the GFC including an 11 per cent crash on May 30, 2008 and a 9 per cent slump on New Year's Eve 2007.

Of course history can only provide so much comfort while this crash remains live. This pandemic still has some way to go before we are in the clear and there are likely to be some more market shocks in coming weeks.