I hope this finds you and your family doing well!
The bear market that started on June 13 has left the S&P 500 Index 23.5% below its January 3 high. After the initial positive reaction to the Federal Reserve’s first 0.75% rate hike since 1994 and tough talk on inflation, heightened fears of recession and that the Fed might “break something” sent stocks down for the 10th week out of 11 for only the second time in history. To help you manage through this difficult period, we answer some of the top questions we’re getting about bear markets.
The current bear market is already old by recent standards. At about five-and-a-half months, it is older than six other bear markets going back nearly 40 years, with only the 2000-2002 tech bubble and 2008-2009 financial crisis bears lasting longer. This means the bear market may be closer to a bottom than many expect. The average bear market since 1950 has taken about 11 months to mark its low, but six out of the last eight bear markets ended within six months [Figure 1]. How this bear market will end will likely hinge on the pace at which inflation declines.
The average bear market since 1950 has seen the S&P 500 decline an average of about 29% (including the near bear markets that saw declines of 19-20%), as shown in Figure 1. Based on current economic conditions, one could make the case that this bear market could be shallower than typical bears because consumers and the job market are still in good shape and interest rates are still low by historical standards.
This bull market that just ended last week was short but powerful. It lasted 21 months from the March 2020 lows through the January 2022 peak, checking in as the shortest bull market since WWII [Figure 2]. However, this bull was also the quickest to ever double, achieving that feat in just five months on August 16, 2020.
From the pandemic lows in March 2020, the S&P 500 rose 114% in less than two years before pulling back 24%. The index is still up 64% off its pandemic lows after this year’s decline, with a total return of 70% including dividends.
After the S&P 500 has entered a bear market, stocks have historically done well, up an average of nearly 15% a year later with an even better median gain of 23.8% [Figure 3].
Stocks have staged some quick recoveries from bear market lows in the past. The average bear market takes about 19 months to get back all of its losses, but shallower bears—those when the S&P 500 falls less than 25%— bounce back faster. As shown in Figure 4, recoveries from bear markets that are down less than 25% take an average of just seven months to recover, while those down more than 25% take 27 months to get back to the prior highs. Lastly, stocks have recently recovered much more quickly, at only four and five months to recover losses from the last three bear markets.
We remain confident that inflation will soon start to improve and continue to get better through year-end and 2023. While a positive year for stocks is a lot to ask at this point, we believe the amount of pessimism reflected in prices today could diminish over the back half of the year, and that is a formula for a potential nice comeback.
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Have a great rest of your week!
Tim Evans, CFP® CLTC
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