The Good News About Bear Markets

The S&P 500 entered into a bear market on Monday, June 13th, which means that the index is down at least 20% from the most recent peak on January 3rd. There is nothing special about the 20% level except that it’s a nice round number for investors to contemplate. Bear markets are fairly common and happen every 3 ½ years going back to 1928. During this time there have been 26 bear markets and this is now the 27th.

This is obviously bad news for investors, as account values are down and history shows it’s likely going to get worse before it gets better. However, bear markets typically last 289 days or about 9 ½ months, and this one would have started after the peak in January. Once entering a bear market, it takes 52 trading days, or about 10 weeks, on average to bottom out. This would put us into August or September if this is the typical bear market. But, no two bear markets are the same[1]
A bear market doesn’t necessarily mean a recession is underway or likely to happen. Since 1928 there have been 26 bear markets but only 15 recessions. Bear markets generally equate to a slowing economy but not necessarily a recession.

Assuming that money is invested for 50 years, one can expect to live through 14 bear markets. It is difficult and frustrating for investors to experience declining accounts, but it’s important to keep in mind that bear markets have always been temporary.

The good news is that expected returns (i.e. forward-looking returns) are highest for investors during bear markets, as markets have eventually recovered and set new highs. Based on the preceding 26 bear markets, once the S&P 500 Index declined by 20%, the index has been higher 75% of the time three months later, by an average of 6.4%. A year after falling by 20%, the S&P 500 has risen 75% of the time, by an average of 17.0%

Selling once markets have fallen by 20% can be a colossal mistake. Over the last 20 years, half of the S&P 500 Index’s strongest days have occurred during bear markets. Another 34% have taken place in the first two months of a bull market – before it was clear that a bull market had even begun. Missing these best performing days can severely impact portfolio returns.

Since 1928, there have been 27 bull markets. Bull markets occur when markets are on the rise in between bear markets and have lasted much longer than bear markets. Bull markets average 991 days or nearly 3 years, and gains have average 114%. Over the last 92 years, the S&P 500 Index has been up 78% of the time.

It can be difficult to keep data and historical trends in perspective. We often let emotion and human behavior drive decision making. Daily headlines can be brutal and there are always market pundits predicting downturns.

It’s critical that investors separate what has already happened with what will likely happen in the future. Markets are already down materially and investors should be thinking about the statistical probability of higher returns in the future – and this goes for stocks and bonds.

We are continuing to monitor current financial conditions. We reduced risk across accounts at year-end by trimming both stocks and bonds and added bond alternatives that do not correlate with bonds and interest rates. Thus, since risk has been reduced to neutral, we have the ability to take advantage of opportunities as they arise.

We will have expanded commentary of markets and updates on proprietary investment strategies within 3-4 weeks at the end of the 2nd quarter. Until then, stay calm and know we are here to steer you through this like we have during previous bear markets.

[1] Source for Bull/Bear markets and recessions is Ned Davis Research as of December 2021.

[2] Barron’s Review & Preview; Nicholas Jasinski; June 13, 2022.