Well, here we are, back in the claws of a bear market. Bear markets, or a market decline of 20% or more from a recent high, happen all the time, but that doesn’t make it easier for investors. (As of June 13th, the S&P 500, Wall Street’s barometer of health, is 21.8% below its record high).
Over the last 70 years, there were 10 distinct bear markets. This suggests, that on average, long-term investors should expect to encounter a bear market once every seven years. The most recent bull market lasted over 10 years, so, despite the pain a bear market brings, it doesn’t come as a surprise.
Not every bear market looks the same. Some are more extreme, such as the global financial crisis when U.S. equities fell nearly 57% during a bear market that lasted roughly 18 months. Other bear markets are mild, such as the 2020 COVID-induced market turmoil when U.S. equites dropped 35.6% over 33 days and recovered six months later.
Despite the differences in duration and severity, all bear markets have recovered their losses and gone on to hit new highs. So, what does this mean for investors? Well, to start – stay calm. It is important to stick to your plan and not allow market fluctuations to lead you to make emotional decisions. Dramatic changes can have a serious impact on your ability to reach your long-term goals. Trying to time the market is nearly impossible, however, history suggests investing new money in a bear market usually leads to positive long-term returns. The chart below shows that each time the market has significantly dropped, the market gain the following year has been significant. This pattern is consistent across bear markets since 1950.
While bear markets can trigger anxiety and fear, it is important to keep things in perspective. Bear markets do not last forever (on average 9.6 months vs. 2.7 years for bull markets) and they do not equate with a recession. There have been 26 bear markets since 1929, but only 15 recessions during that time. Bear markets coincide with a slowing economy, but a declining market doesn’t always mean a recession is looming. Keep in mind, markets are positive the majority of the time. Of the last 92 years of market history, bear markets have comprised only 20.6 of those years. Or, said another way, stocks increase in value 78% of the time.
Hang in there, this too shall pass!
