5 Facts About Bear Markets
It’s been a couple of years since we’ve experienced a bear market, so it’s probably a good time to review the facts. Things could surely get worse before they get better, or it could be over already. The bottom will look obvious in hindsight but predicting it in real-time is not easy.
Bear markets can be painful, but they’re normal, inevitable, and most importantly, they don’t last forever. Historical comparisons cannot provide the blueprint for the current situation, but they can help put things in perspective. As the saying goes, “history doesn’t repeat itself, but it often rhymes.”
1. What is a Bear Market?
A bear is a prolonged period of price declines in a stock market, usually of 20% or more from a recent high. Recently, the stock market declined 19% from its high at the start of 2022.
Since 1950, the average bear market lasted 338 days (with a range of 33 to 929 days) and saw the stock market fall an average 30.2% (with a maximum decline of 56.8%). It’s worth noting that not all bear markets come with a recession.
2. How Often Do They Happen?
Investors like to avoid stock market declines at all costs, but declines are an inevitable part of investing. On average, here’s how often the stock market has experienced declines:
- 5% three times per year
- 10% once per year
- 20% once every six years
This is the price of admission when investing. Markets won’t give you a high return without bumps along the way. Unfortunately, there is no magical investment that can avoid this.
3. How Long Do They Last?
Here’s a look at every bear market going back to 1950 that shows the drawdowns and how long they lasted:
Historical comparisons cannot tell us exactly what will happen, but they can help put things in perspective in terms of what previous bear markets looked like.
In hindsight, every bear market was a buying opportunity. But every time you are living through market declines it feels like it will never end.
4. Benefits of Staying Invested
Selling during a bear market can significantly reduce your returns. Since 2002, seven of the best 10 days occurred within two weeks of the 10 worst days. If you missed the 10 best days, your annual return is reduced from 9.52% to 5.33%.
5. Bear and Bull Market Cycles
Some people assume investing in stocks is a consistent return year after year. While that may be true in the long run, the market rarely delivers an average return in any given year.
Throughout history you can see there have been numerous bear and bull markets. This chart can help give us a fresh perspective on the benefits of investing for the long- term.
Bottom Line
My best piece of advice is to be prepared. You can do this by having ample emergency savings and an investment portfolio that takes appropriate risk. Successfully navigating a bear market will require patience. If you have any questions or would like to schedule a review meeting, please reach out.
George Maroudas
847-550-6100
george@pmgwealth.com
Twitter @ChicagoAdvisor
Sources/Disclaimer:
Stock market represented by the S&P 500 index.
Bear market definition from BankRate.com
History of market corrections/Frequency from CapitalGroup / American Funds
S&P 500 Bear Markets Since 1950 from Ben Carlson
From 1928-2021, the annual return for U.S. Stock Market 9.9% from Stern.NYU.edu
Stock Market Bull and Bear Cycles from Clearnomics
Stock investing includes risks, including fluctuating prices and loss of principal. This information is not intended to provide specific advice or recommendations about any stock nor is it intended to be a recommendation to buy, sell or hold any stock investment. We suggest speaking with your financial professional about your situation prior to investing.
Please consult your financial advisor regarding your specific situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy ensures success or protects against loss. This information is not intended to be a substitute for specific individualized tax advice. The Standard & Poor’s Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
