Morningstar - Q2 2021 - 41

The Turkey That Didn't Gobble
The COVID-19 crash was the least painful
bear market of the past 150 years.

my article last spring that shows the history
of market crashes ( EXHIB IT 1 ). This exhibit displays
U.S. real (inflation-adjusted) equity returns
from 1871 through March 2021. It's based on a
series of returns I created to form a hypothetical
U.S. stock market index.4
The exhibit illustrates two important aspects of U.S.
market return history.

MARKETS

Paul D. Kaplan

When we look back at the market crash caused
by the COVID-19 pandemic, it reinforces
two important lessons for long-term investors:
1 Do not panic and sell stocks when the
market crashes.
2 It is very hard to predict how long a stock
market recovery will take.

During the downturn, I made these points in an
article we published about the history of
market crashes.1 I showed that the 150-year record
of U.S. market returns is littered with severe
downturns of 20% or more. In each case,
the market eventually recovered and then went
on to new heights.
A market decline of 20% or more is often considered
to be a bear market. In the article, I called each
historical episode of a bear market crash a black
turkey. I borrowed the term from researcher Larry
Siegel to make a point. Siegel, the research
director at the CFA Institute Research Foundation
and a former colleague of mine at Ibbotson
Associates, defines a black turkey as " an event
that is everywhere in the data-it happens all the
time-but to which one is willfully blind. " 2
Siegel introduced the term, somewhat tongue in

cheek, in contrast with black swan, which is an
event that has never been seen before and
could not have been foreseen. Black turkeys are
an apt description of severe market crashes
because they continue to take people by surprise
despite the long history of their occurrences.
A year later, it seems that the COVID-19 black
turkey episode ended before it really got started.
It was the turkey that didn't gobble.3
After a decline of 20% (in real terms) from
December 2019 to March 2020, the U.S. equity
market fully recovered in just four months
and was back to its precrash level by July. Since
then, it has, once again, reached new heights.
The quick, unexpected recovery is evidence of
our second lesson: One can never predict
how fast a recovery will take place. In the case
of COVID-19, the rebound was a puzzle because
the U.S. economy suffered as a result of
the restrictions on economic activities imposed
to contain the pandemic. Ultimately, as the
rate of vaccinations increases and herd immunity
is eventually reached, the economy will open
up and activities will resume. But no one knows
how this will affect the stock market.
A Long History of Market Crashes
To put the COVID-19 crash and market recovery
into context, I updated a chart that accompanied

First, the blue cumulative wealth line shows the
growth of $1 (in 1870 U.S. dollars), with
dividends reinvested, in the stock market index.
Over a period of about 150 years, despite
numerous severe drops, $1 grows to $22,580. In
other words, staying in the market and weathering
the storms has paid off for investors.
As I wrote in a follow-up article last year, this
could be a case of survivorship bias.5 The
U.S. equity market has had a phenomenal run.
Other countries' markets were not as lucky.
Being on the losing side of a world war or two,
the overthrowing of capitalism, or just
prolonged poor market performance have wiped
out the capital of some countries' investors.
Therefore, when analyzing historical performance
data on U.S. markets, or other unusually
successful markets, and drawing conclusions
from those data, our findings may be
distorted by survivorship bias. Also, not only does
the U.S. have a unique capital market
history relative to other countries, but the period
over which we measure the capital markets
is unique in human history. There was
essentially no economic progress for most
of human history until a little over 200
years ago. So, we are measuring what happened
in a unique market over a unique period in
history, a practice that compounds two separate
sources of bias.

1 Kaplan, P. 2020. " Black Turkeys Everywhere. " Morningstar magazine, Q2, pp. 37- 41.
2 Siegel, L.B. 2010. " Black Swan or Black Turkey? The State of Economic Knowledge and the Crash of 2007-2009. " Financial Analysts Journal, July/August.
3 Inspired by the great fictional detective Sherlock Holmes, who noted that it is important to observe what did not happen. In The Adventure of Silver Blaze (Sir Arthur Conan Doyle, 1892),
the significant nonevent was that the dog did not bark.
4 For a description of how these data were compiled from the sources listed under the exhibits, see: Kaplan, P.D. et al. 2009. " The History and Economics of Stock Market Crashes. "
Insights into the Global Financial Crisis. Siegel, L.B. ed. (Charlottesville, Va.: CFA Institute Research Foundation); Kaplan, P.D. 2009. " One and a Quarter Centuries of Stock Market Drawdowns. "
Morningstar Alternative Investments Observer, Third Quarter. Also appears in Kaplan, P.D. 2012. Frontiers of Modern Asset Allocation. (Hoboken, N.J.: John Wiley & Sons), Chap. 16; Ibbotson,
R.G. 2020. 2020 SBBI Yearbook: Stocks, Bonds, Bills, and Inflation. (Chicago: Duff & Phelps), Chap. 11.
5 Kaplan, P.D., & Siegel, L.B. 2020. " Accounting for Survivorship. " Morningstar magazine, Q3, pp. 34 -38.

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