For Stock Market Investors – How Long Does the Average Bear Market Last?
History Doesn't Repeat Itself, but It Often Rhymes.
Down over 20% from its ATH, the S&P 500 has officially entered a Bear Market. Now that this reality is upon us all, you must have the following question on the edge of your lips: how long will this Bear Market last?
Rest assured, whether big or small, all investors are asking this question right now. To try to answer it as objectively as possible, the best way is to look at the statistics.
First of all, let's be clear about the vocabulary. A Bear Market is a phase during which the markets have fallen by 20% from their last peak. As the S&P 500 has dropped 21% since the ATH at the beginning of 2022, it has joined the Nasdaq in a Bear Market. This index of technology stocks had already fallen by more than 30%.
So, of course, every investor knows the formula: "Buy the dip!". When the markets have collapsed, it's time to buy and then be patient. However, there are as many opinions as there are financial institutions on what to do now.
For the world's largest asset manager, BlackRock, now is not the time. BlackRock believes that the Fed will raise rates by more than what was initially expected, probably by 75 basis points on June 15, 2022. This is also the opinion of Barclays and Jefferies.
JP Morgan is more optimistic. Marko Kolanovic thinks that the US will avoid recession, despite what the Atlanta Fed's GDPNow index suggests. Yet this sentiment has been fueling Bear Markets since the beginning of 2022. If the risk of recession disappears, the trend could very quickly be reversed. It is worth noting that the ECB is not forecasting a recession in Europe either.
What does history tell us?
“History Doesn't Repeat Itself, but It Often Rhymes”
— Mark Twain
You may have read this famous quote by Mark Twain many times before. It often proves to be true, which makes it all the more interesting to look closely at the statistics when trying to figure out how long a Bear Market lasts on average.
The last Bear Market in America was also the shortest in history. A very exceptional situation caused by the COVID-19 pandemic. The S&P 500 lost 34% from February 19th to March 23rd:
Then we have to go back to the financial crisis of 2008-2009 with a double Bear Market. The Bear Market lasted 62 days, from January 6, 2009, to March 9, 2009, when the index lost more than 27%. But the previous one was much longer, from October 9, 2007, to November 20, 2008, or 408 days, during which the index fell by almost 52%:
The longest S&P Bear Market lasted from January 11, 1973, to October 3, 1974, a period of 630 days or 21 months, during which the index fell by more than 48%. A period that was also characterized by high inflation, but the conditions for falling GDP and rising unemployment were not met this time.
The worst period was of course the Great Depression, with no less than 10 Bear Markets in the 1930s.
The average duration of an S&P 500 Bear Market, according to Seeking Alpha's figures, is 268.3 days, or 38 weeks or just under 10 months. For the Nasdaq, its worst Bear Market occurred during the bursting of the dot-com bubble in early 2000, when the index fell 75% in mid-October 2002. Nasdaq also experienced a Bear Market throughout the financial crisis, which only ended in November 2013.
Final Thoughts
The first lesson you should take from these statistics is that a Bear Market always ends. It's good to read that as panic takes over the financial markets. The second lesson is that each time, the S&P 500 has rallied back above its previous ATH. The third lesson, which is a corollary of the second one, is that it is in these Bear Market periods that great opportunities to make big profits are found.
Finally, the fourth lesson is that patience makes the difference in coming out on top in these Bear Market phases. So you know what you have to do. For inspiration on great opportunities, you can look at an investor like Warren Buffett who generates passive income from solid businesses that pay large dividends year after year.
Some reading
The 7 Stages of a Bear Market – Where Are We With Bitcoin? Probably between panic and accumulation/stabilization.
We’re Headed for a Recession — The Atlanta Fed’s GDPNow Indicator Says So. The American economy is contracting at a rapid pace.
Elon Musk’s Strategy to Hedge Against Inflation? Own Physical Things Rather Than USD. Always welcome advice as inflation soars in America.