The Dow is in a bear market. Here's how bad it could get

Published Wed, Mar 11 20204:56 PM EDT

The Dow Jones Industrial Average made its official entrance into a bear market on Wednesday after the World Health Organization declared the novel coronavirus a global pandemic and aggravated investor anxiety that the disease would undermine economic growth. The blue-chip index on Wednesday closed more than 20% below the record close that it notched less than one month ago on Feb. 12. The S & P 500, the more widely tracked index among investors, managed to hover just above bear market territory by the close of trade, but remained more than 19% below its own all-time high. But amid the Wall Street bloodbath, Goldman Sachs took some relief in the fact that the current market rout appears event-driven, or triggered by a specific catalyst. David Kostin, Goldman's chief U.S. equity strategist, wrote in a note to clients that when specific events spark bear markets, stocks' recovery tends to be stronger than it otherwise would be. That could bode well for investors if the new coronavirus proves to the main reason behind the sell-off and only hurts economic growth for a few months. "By year-end, economic and earnings growth will be accelerating, the fed funds rate will be at the zero lower bound, and the impact of any fiscal stimulus will be flowing through to consumers," Kostin wrote in a note Goldman published on Wednesday. "Using on our top-down 2021 EPS estimate, the implied year-end 2020 level of the S & P 500 index would equal 3200, roughly 30% above the mid-year low," he added. "This 6-month rally from the trough would be modestly higher than the historical median return following previous "event-driven" bear markets (+21%)." To be sure, the tone of Kostin's note was arguably negative as the Goldman stock strategist declared that a pending 2020 earnings recession "imperils [the] bull market." He wrote that the historic fall in interest rates is unlikely to prevent a "collapse" in second- and third-quarter profits, and he advised clients to tilt investments toward companies with stable earnings and strong balance sheets. "After 11 years, 13% annualized earnings growth and 16% annualized trough-to-peak appreciation, we believe the S & P 500 bull market will soon end," Kostin warned in a note. "Investors have cut their equity positions in recent weeks, but not to levels reached at the trough of other major corrections this cycle." The stock strategist slashed his midyear S & P 500 forecast to 2,450, meaning the investment bank now sees the market falling another 15% beyond Tuesday's close to levels not seen since December 2018. If the bear market is more like a typical one and not like the "event-driven" ones Goldman describes, then things could get rougher for investors. Here's the historical round-up on all bear markets, including how bad they get, on average, and typically how long they last. There have been 12 bear markets since World War II with an average decline of 32.5% as measured on a close-to-close basis. Bear markets have lasted 14.5 months on average and have taken two years to recover back to previous highs, on average. The most recent was October 2007 to March 2009, when the market dropped 57% and then took more than four years to recover. (The S & P 500 closed in a bear market in December 2018 using intraday data but not on a closing basis.) Subscribe to CNBC PRO for exclusive insights and analysis, and live business day programming from around the world.

Jacob W. Frank | Getty Images

The blue-chip index on Wednesday closed more than 20% below the record close that it notched less than one month ago on Feb. 12. The S&P 500, the more widely tracked index among investors, managed to hover just above bear market territory by the close of trade, but remained more than 19% below its own all-time high.

But amid the Wall Street bloodbath, Goldman Sachs took some relief in the fact that the current market rout appears event-driven, or triggered by a specific catalyst.

David Kostin, Goldman's chief U.S. equity strategist, wrote in a note to clients that when specific events spark bear markets, stocks' recovery tends to be stronger than it otherwise would be. That could bode well for investors if the new coronavirus proves to the main reason behind the sell-off and only hurts economic growth for a few months.