Bear Markets: What to Know
With all the talk about a bear market, we thought it was an ideal time to discuss it and share some insights on the subject.
Bear Market, Defined
For major U.S. stock indexes, a bear market is defined as a 20% decline from its most recent all-time high over a prolonged period of time. Typically, the period of decline is associated with negative investor sentiment[i], weak economic data releases, and expectations of a shrinking economy.
For those keeping score at home, the S&P 500 (considered the broadest measure of the U.S. economy) recently experienced a 20% decline from its all-time closing high reached on January 3rd, 2022, of 4796.57. Bear market territory is 80% of that level: 3837.26[ii]. This price area for the index has the attention of asset managers and traders.
So far, 2022 has been the year of the bear.
Bear Market Durations
Good news–bear markets tend to last a much shorter period of time than their bull market counterparts. According to CNBC, the average bear market lasts 359 days[iii], although there are no one-size-fits-all scenarios.
Let’s consider some recent bear markets:
- Coronavirus bear market (2020) 33 days[iv]
- The Great Recession bear market (2007-2009) 408 days[v]
- Dotcom bear market (2000-2002) 1.5 years[vi]
Each bear market has its own circumstances–including varying economic backdrops and events. Coronavirus featured, well, coronavirus. The Great Recession was all about subprime mortgages, and the Dotcom bear was about an overinflated tech market in the internet’s early days.
Contrarily, bull markets last much longer than bear markets historically, with the average bull market duration being 3.8 years since 1932 (according to data from Kiplinger[vii]). The longest bull market is fresh on everyone’s mind–lasting 11 years from 2009 to 2020. This fact coupled with strategic and informed millennials who have never experienced true bear market territory creates some interesting emotional rollercoasters for many investors. I guess you could say all of us sitting on this spinning globe are in unchartered waters.
For the current market cycle, we have inflation and interest rates front-and-center. The S&P 500 closed in bear market territory on June 13th, 2022, marking a 20% decline from the peak. Those looking to buy a home for the first time are taking baby steps as they nervously keep an eye on the news and their dream of being a homeowner.
The Bear’s Claw
It’s good to be aware of bear markets, but that doesn’t mean you should fear them. They are inevitable and are part of the journey of every long-term investor.
That said, bear markets do have ramifications outside of Americans’ investment portfolios. While each bear market is different, the current economic landscape has consumers cutting back[viii] due to high prices. No surprises there.
Looking ahead, once inflation cools down and pricing begins to come back to earth, there could be a demand slowdown, though that is not a certainty. The slowdown would result from consumers needing time to recover from this period of higher costs. Combining cooling demand and a bear market environment could result in a period of stagflation[ix]—more on that another time.
Discipline and Longevity
The reality is that nobody knows with any degree of certainty how long major stock indexes could remain in bear market territory.
Here is what we do know: bear markets are just as inevitable as bull markets. Fortunately, bear markets occur much less frequently than their bull market counterparts.
Regardless of the point in time of a market cycle, the disciplined long-term investor mindset should remain consistent. After all, building a secure future[x] by accumulating assets over time will inevitably provide exposure to several market cycles[xi] and their associated peaks and valleys.
With that said, for some, it may be worth adjusting investments[xii] in the face of a market downturn. If you have questions about your portfolio or market cycles, or if there is anything we can help you with, please reach out, and we’ll discuss.
[i] Taylor, C. (2022, June 17). Fortune.com. Investors right now are ‘uber-bearish’ BofA says. [Online] Available at: Sentiment on Wall Street plummets to ‘uber-bearish’ level: BofA | Fortune
[iii] Vega, N. (2022, June 14). Cnbc.com. Stocks have officially entered bear market territory – here’s what that means and what you should do. [Online] Available at: What experts say to do during a bear market (cnbc.com)
[iv] Shaban, H., Telford, T., & Gregg, A. (2022, June 14). Washingtonpost.com. The stock market is in bear territory. What does that mean? [Online] Available at: What is a bear market? – The Washington Post
[v] O’Neil, Kirk. (2022, June 13). TheStreet.com. How Long Does the Average Bear Market Last? [Online] Available at: How Long Does the Average Bear Market Last? – TheStreet
[vi] Kolakowski, M. (2022, June 16). Investopedia.com. A Brief History of U.S. Bear Markets. [Online] Available at: A Brief History of Bear Markets (investopedia.com)
[vii] Burrows, D. & Smith, A. (2020, August 19). Kiplinger.com. 10 Things You Must Know About Bull Markets. [Online
Available at: 10 Things You Must Know About Bull Markets | Kiplinger
[viii] Kavilanz, P. (2022, June 2). Cnbc.com. How America is coping with inflation: Buy what’s needed, nothing more. [Online] Available at: Inflation is changing consumer behavior: We buy what’s needed, nothing more – CNN
[ix] (2022, June 7). Worldbank.org. Stagflation Risk Rises Amid Sharp Slowdown in Growth. [Online] Available at: Global Economic Prospects June 2022 (worldbank.org)
[x] Reinieke, C. (2021, Jul 1). Cnbc.com. Investing in the stock market is one of the best ways to build long-term wealth. [Online] Available at: Investing in the stock market is one of the best ways to build wealth (cnbc.com)
[xi] CFI Team. (2020, May 2). Corporatefinanceinstitute.com. Market Cycle: What is Market Cycle? [Online] Available at: Market Cycle – Overview, How To Determine, Phases (corporatefinanceinstitute.com)
[xii] Benson, A. (2022, June 14). Nerdwallet.com. What Is a Bear Market and How Should I Invest During One? [Online] Available at: What Is a Bear Market and How Should I Invest During One? – NerdWallet