History of U.S. Bear Markets


Fat bear sitting in the grass

What is a bear market?

A “bear market” is defined as a 20% drop in investment prices from some recent high. For example, the Dow Jones Industrial Average or NASDAQ can individually be in a bear market, though the term is often used to refer to the market as a whole. Bear markets often coincide with recessions, but they don’t have to, and not all bear markets necessarily align with recessions. There have been 26 bear markets in the U.S. since the late 1920’s, but only 15 recessions during the same time interval. They tend to cause a lot of concern and fear among investors, but history as repeatedly shown these downturns to be excellent buying opportunities that are relatively short in duration, especially compared to “bull markets”, which are much longer. While recessions are often a cause, there are a variety of reasons why the market would have a 20% drop from recent highs. The current bear market in the U.S. is linked to rising interest rates being used to fight high inflation. But historically, these downturns have a variety of causes, including wars, pandemics, and geopolitical issues. A bear market ends when the ending price of an index gains 20% from its most recent low price. So, in especially volatile conditions, you can have multiple bull and bear markets within the same year.

How long do bear markets last?

Bear markets tend to be very short when compared to the overall trajectory of U.S. business growth. They are short rapid declines that represent a contractionary period, likely associated with the business cycle if during a recession. The average length of a bear market is 289 days. By contrast, the average length of a bull market in the U.S. is 991 days. The average loss during the 26 bear markets since 1929 is 36%. The average gain during the 27 bull markets since 1929 is 114%. Bear markets cause a lot of fear among investors, and it can be difficult for people to see the big picture. What is that big picture? It’s that markets are overwhelmingly positive most of the time. Declines are short and brutal, but most of the time the market is going up. Since 1929, bear markets have only been represented in about 21 of those years. The other 71 years, stocks have been in a rising bull market (approximately 78% of the time).

What should you do during a bear market?

During the past 20 years, 50% of the best performing days in the S&P 500 were during a bear market. Over 30% of the best performing days took place in the two-month period immediately preceding a bear market, before it was clear that the market was even in bear market territory. In other words, the best way to weather a downturn would be to stay invested since it’s difficult to time the market’s recovery. If over 80% of the best performing days are associated with a bear market (see above), it’s the worst time to pull assets and try and time the market, which most professional investors know does not work. Nobody can predict the daily, weekly, or monthly swings of the market and it often acts irrationally. Most of the investment gains for an entire calendar year happen in less than 30 days. If you sell and miss only a few days of huge gains, your earning potential over decades plummets massively. Even missing 5 of the “best days” in a year leads to large growth losses. Bear market tends magnify this effect even more.

Data from Hartford Funds/Ned Davis Research/National Bureau of Economic Research

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