Bear markets are periods when the stock market declines by 20% or more from a recent peak (a 52-week high, for example). Using the S&P 500 Index as a measure, you can see that there have been several bear markets throughout its history.
Despite bear markets, the stock market has been up more than it's been down. From 1950 through 2020, the S&P 500 was up 53.7% of days and down 46.3% of days, and the percentage of positive days exceeded negative days in every decade.
- Bear markets occur when a market index tracks a market decline of at least 20% from a recent peak.
- Bear markets tend to recover and increase to higher levels, offering higher returns for those who endured them.
- Bear market recoveries generally provide the most returns based on time in the market.
- You shouldn't cut your contributions to your retirement accounts during a bear market.
What Causes a Bear Market?
The prices of stocks and other securities are influenced by a range of factors, including investor confidence. A stock price will tend to fall when investors lose faith in its performance, whether due to the stock or backing company or to the strength of the economy at large. Investors may sell their securities to avoid losses, and if this is happening on a large scale, it can cause a wave of selling, which in turn causes prices to drop.
It's supply and demand at work in the most simple sense. So during widespread recessions or periods of investing fear, the whole market can experience price drops. When a given index (whether the S&P 500, the Dow Jones, the Nasdaq, or another market) can measure a drop in excess of 20%, the market is technically in bear territory.
Historic Market Tumbles
After the COVID-19 pandemic hit in March 2020, the economy suffered and many investors anticipated a bear market in its wake. The stock market crashed, with the Dow Jones Industrial Average and the S&P 500 Index both falling more than 20% (down 33% to be precise) from their 52-week highs in February. However, the 2020 bear market proved to be short-lived. The stock market saw healthy gains since the crash in March 2020, with the S&P posting a 26% return in 2021.
In 2022, however, the markets began to creep downward. As of May 12, 2022, the S&P 500 is teetering on the edge of an official bear market, while the Nasdaq entered bear market territory in April 2022.
Other bear markets, as measured by the S&P 500, include:
- 2007-2009: down 57% over 1.4 years
- 2000-2002: down 49.1% over 2.5 years
- 1987: down 33.5% over 101 days
- 1980- 1982: down 27.1% over 1.7 years
- 1973-1974: down 48% over 1.7 years
- 1968-1970: down 36.1% over 1.5 years
- 1966: down 22.2% over 240 days
- 1961-1962: down 28.0% over 196 days
- 1957: down 20.7% over 99 days
- 1948-1949: down 20.6$ over 363 days
- 1946: down 26.6% over 133 days
- 1940-1942: down 34.5% over 1.5 years
- 1939-1940: down 31.9% over 229 days
- 1938-1939: down 31.9% over 229 days
- 1937-1938: down 54.5% over 1.1 years
- 1934-1935: down 31.8% over 1.1 years
- 1933: down 29.8% over 95 days
- 1932-1933: down 406% over 173 days
- 1930-1932: down 83.0% over 2.1 years
- 1929: down 44.7% over 67 days
For investors who sold at the bottom of these markets, the lower stock prices had a detrimental effect. Those who stayed in long enough to experience a subsequent recovery were better off. Remaining focused on the long-term is important in the middle of a bear market.
Recovering From a Bear Market
Bull markets often follow bear markets. These are defined as an increase of 20% or more in stock prices. There have been many bull markets since 1930. While bull markets often last for years, a significant portion of the gains typically accrue during the early months of a stock market rally.
In the years after the "troughs" of the bear markets throughout the stock market's history, indexes have generally gained close to half of their previous highs.
For example, after the S&P 500 bottomed at 777 on Oct. 9, 2002, following a 2.5-year bear market, the stock index then gained 15% over the following month and a total of 34% over the following year.
The S&P 500 bottomed at 676.5 on March 9, 2009, after declining 57%. From there, it began a remarkable ascent, roughly doubling in the following 48 months.
Investors who are considering moving entirely out of stocks during bear market declines might want to reconsider such action since properly timing the beginning of a new bull market can be challenging.
Those 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.
Investing During a Bear Market
If you have cash, you may want to consider buying opportunities during a bear market. Historically, 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 to be "on sale."
As a rule of thumb, set your investment mixture according to your risk tolerance, and re-balance your portfolio to buy low and sell high.
You shouldn't 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 you won't need for another five to 10 years should be in stocks. This process of allocating capital 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.
Frequently Asked Questions (FAQs)
What's the difference between a bear market and a bull market?
Bear markets happen when the stock market declines by 20% or more and a bull market is when the stock market increases by 20% or more (much in the way bears are known to hibernate or withdraw, while a bull charges forward).
Should I sell my stock during a bear market?
Investment advice should always be personally tailored to your portfolio, goals, and risk tolerance, so consult a financial advisor if you need particular guidance. However, markets work in cycles, so many investors choose to wait out the bear markets, and possibly even take advantage of low prices, endure the risk, and buy more.
How does a bear market end?
When prices are low, as they are during a bear market, there are a set of investors who will find this to be a good time to buy. As they do, prices will start to rise again, possibly stabilize. The market is always course-correcting, naturally rising and falling due to supply and demand.