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The Beast Defined

Bear markets are commonly defined as any fall of at least 20% from an index’s all-time high, with the duration and depth of the pullback measured peak to trough, starting from the previous high to the eventual bottom. The bear market in 2022 began on January 3 and as of this writing is still ongoing. Bear markets are distinct from “corrections,” another commonly used benchmark indicating a decline of 10% from a prior high.

How Frequent and How Long?

Since the end of World War II, the S&P 500 Index has weathered 13 bear markets, one every six years on average. Market corrections, by contrast, have occurred much more frequently, about once every other year. The typical price decline in a bear market has been 33% and the duration of bear markets averages just over one year.

Of course, actual declines and durations vary widely. The steepest bear market in this period occurred in the wake of the Great Recession of 2007-09, when the S&P 500 dropped 57%, while the shallowest occurred from 1948 to 1949, with a decline of 21%. The shortest bear market on record coincided with the onset of the Covid-19 pandemic in March 2020 and lasted only 33 days. The longest followed the bursting of the dot-com bubble and lasted 929 days, from March 2000 to October 2002.

What it all Means for Investors

Clearly, in the short run, bear markets can cause investors financial pain as well as stress and anxiety, but they do not necessarily carry any greater significance. It is true that bear markets often coincide or even pre-date recessions – but not always. The bear market in 1987 did not presage a recession; nor did the two bear markets in the 1960s.

While it is natural to equate weakness in the stock market with weakness in the broader economy, the market is just one of many indications of the economy’s overall health. Just as important are readings on employment, inflation, housing, credit, and consumption, to name a few. The market, like the economy, tends to move in cycles, and bear markets are simply a result of these ups and downs. The trend over the longer term, however, has always been to the upside, as gross domestic product (GDP) continues to rise over time. Any longer-term chart of the S&P 500 Index, such as that shown at the end of our Commentaries, confirms this trend.

In fact, for investors focusing on the longer term and with cash on hand, bear markets have been outstanding times to invest. Every bear market in the post-war era has been followed by a bull market lasting several times longer, with an average gain of 177%. Indeed, one of the worst mistakes an investor can make is selling at the bottom of a bear market and sitting on the sidelines as the market recovers.

As the chart below illustrates, future annual returns have typically been stronger following a market that is down significantly from its all-time high. This helps demonstrate some of the following traditional investment advice (within the context of an appropriate investment plan):

  • Continuing to invest during a market downturn should typically aid in building long-term wealth.
  • A market downturn may be a more favorable time to invest additional funds than when the market is hitting new highs.
  • Selling during a bear market, especially for those with a long-term focus, can be detrimental to long-term portfolio growth.

To be sure, bear markets can be challenging episodes to endure, but as is often the case with investing, maintaining resolve and staying the course through tough times can be the best option for investors with a long-term focus.