U.S. Stock Bear Markets and Their Subsequent Recoveries
Bear markets, defined as a period where the stock market goes down 20% or more, from the highest point to subsequent lowest point, happen frequently. From 1900 – 2014, there were 32 bear markets. Statistically, they occur about 1 out of every 3.5 years and last an average of 367 days.
Historical Market Tumbles
For those old enough to remember, in the 1970's the market dropped 48% over 19 months and in the 1930's dropped 86% over 39 months. The most recent U.S. bear market occurred in 2007-2009 when the stock market dropped 57% over 17 months. Another notable bear market is Japan's "Lost Two Decades" from 1998 to present where market values were noted as having declined 80%.
For investors who sold at the bottom of these markets, these down times had a detrimental effect. Investors who maintained a diversified portfolio and stayed invested so they experienced the subsequent recovery were not harmed. Remaining focused on the long-term is an important thing to do when in the middle of a bear market.
The Year After a Bear Market Is a Boom
In the 80 years from 1934 – 2014, as measured by the calendar year, the S&P 500 stock index has suffered total return losses of at least 20% in four different years, the most recent was 2008’s 37.0% decline. In the year after the three previous 20%+ tumbles, the index gained an average of +32%. You have to be willing to stay invested in the market during the down times to participate in the recovery.
Despite Bear Markets, More Good Than Bad Has Prevailed
Here is the split between “up” and “down” time periods for the S&P 500:
- Days: 53% “up” and 47% “down.”
- Months: 58% up, 42% down.
- Quarters: 63% up, 37% down.
- Years: 72% up, 28% down.
- 5 Year Rolling Time Periods: 76% up, 24% down.
- 10 Year Rolling Time Periods: 88% up, 12% down.
Recovering From a Bear Market
Bull markets follow bear markets. There have been 14 bull markets (defined as an increase of 20% or more in stock prices) since 1930. While bull markets have often lasted for multi-year periods, a significant portion of the gains has typically accrued during the early months of a bull market rally.
For example after the S&P 500 bottomed at 777 on 10/09/02 following a 2 ½ year bear market, the stock index then gained +15.2% (total return) over the subsequent 1-month period. Investors who flee to cash during bear markets should keep in mind the potential cost of missing the early stages of a market recovery, which historically have provided the largest percentage of returns per time invested.
Another example, after declining by nearly 40% in 2008, the S&P 500 continued its drop until it bottomed at 683 on March 9, 2009. From there it began a remarkable ascent, climbing over 100% in the following 48 months. By definition, new bull markets are not known until the stock market has already increased by 20%. Investors who are prone to move entirely out of stocks during bear market declines might want to re-consider such action, as attempting to properly time the beginning of a new bull market can be challenging.
Investing During a Bear Market
If you have cash, considering buying opportunities during a bear market. Historically speaking, the S&P 500 Price to Earnings Ratio (P/E) has been notably lower during bear markets. When investors are more confident, the P/E ratio typically increases making stock valuations higher. Professional investors LOVE bear markets because stock prices are considered "on sale."
As a rule of thumb, set your investment mixture according to your risk tolerance and re-balance in order to buy low and sell high. Never cut contributions to retirement accounts during down markets. In the long run, you will benefit from buying new shares at lower prices and will achieve a lower net average purchase price.
If you're in retirement, only the portion of your money that you won't need for another five to ten years should be in stocks. This process of allocating money according to when you'll need it is called time segmentation. You want a retirement plan that allows you to relax and not have to be concerned about the daily, monthly, or even yearly market gyrations.
(Statistical references from BTN Research and Fidelity Investments.)