U.S. Stock Bear Markets and Their Subsequent Recoveries

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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 53.8% of days and down 46.2% of days, and the percentage of positive days exceeded negative days in every decade.

Key Takeaways

  • Bear markets tend to recover and increase to higher levels, offering higher returns for those who endured it.
  • 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.

Historic Market Tumbles

The most recent U.S. bear market started in 2020. The stock market crashed in March, with the Dow Jones Industrial Average and the S&P 500 Index both falling more than 20% from their 52-week highs in February.

Some other bear markets, as measured by the S&P 500, include:

  • 2007-2009: down 57% over 1.4 years
  • 1973-1974: down 48% over 1.7 years
  • 1930-1932: down 83% over 2.1 years
  • 1929: down 44% 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. There have been many bull markets—defined as an increase of 20% or more in stock prices—since 1930. While bull markets often last for years, a significant portion of the gains typically accrue during the early months of a 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, considering 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.