It finally happened. On Monday the S&P 500 Index moved into a bear market, finally closing 20% beneath the January 3 high.
Here are 7 things to know about bear (and bull) markets:
1) Since World War II seven bull markets have officially doubled. The recent bull market was the fastest to ever double, but it also ended much quicker than the others at less than two years old.
2) The bull market that just ended lasted only 21 months from the March 2020 lows until the January 2022 peak, checking in as the shortest bull market since WWII. As noted above though, it was also the quickest to ever double. Wow.
3) Here are all the bear (and near bear markets) since 1950. “This bear market is actually already old by recent standards,” explained LPL Financial Chief Market Strategist Ryan Detrick. “At more than five months old, it is already older than six other bear markets going back nearly 40 years. Only the tech bubble and Great Financial Crisis bears lasted longer.”
This could mean the bear market could be closer to a bottom than many expect.
4) What could happen next? The good news is a year after the S&P 500 moves into a bear, stocks actually do pretty well, up an average of nearly 15% a year later with a very solid median gain of 23.8%.
The catch, and there’s always a catch, the returns a year later were negative in the 1973-74 recession, the tech bubble, and the Financial Crisis (2008-2009). The good news is we don’t see an economy like that over the next year, so the likelihood of higher prices (maybe significantly higher) is quite strong, in our view.
5) How quickly could stocks bottom once a bear starts? The data is all over the map here. It took only 11 days in March 2020 for the lows to form, while it took 18 months after the tech bubble. Bottom line, we think this could play out more like things did in 1987 or the 1950s and 1960s with the ultimate low taking place sooner rather than later.
6) Looking at previous bears that took place without a recession (still our base case), showed that stocks tend to bottom at a little more than down 20%. Yes, 1987 is in there, but most of the other times stocks bottomed near where we are now, suggesting potentially limited pain from current levels.
7) Investors need to remember that since the S&P 500 Index moved to 500 stocks on March 4, 1957, it has made 1,184 new all-time highs and it has always eventually achieved new highs, even if it doesn’t feel that way today. Wars, sky-high inflation, recessions, bubbles, 100 year pandemics, geopolitical events, policy mistakes, and more have all happened over this time, but stocks have always come back eventually to new highs. We do not think this time will be any different. As long as businesses can grow earnings over the long run, the fundamentals are in place for future stock gains, which means new highs could be coming as well.
They say the stock market is the only place things go on sale and people run out of the store screaming. Please remember that before you make any rash investment decisions.
Lastly, the S&P 500 was just down more than 1% for four consecutive days. This very rare occurrence hasn’t been fun for investors, but be aware the returns after these painful streaks have been very strong, higher a year later 9 out of 9 times, with a solid 26.7% gain on average. Additionally, each consecutive day saw a larger loss than the previous during the four day streak. That has only happened two other times in history, in March 2009 and December 2018. Those weren’t the worst times to be looking for opportunities.
As always, if you have concerns about your own portfolio’s exposure to risk please feel free to reach out and schedule a call to discuss how we can assist you with your allocation and risk decision.
Bryan Foronjy, CFP®
Founder and Principal Wealth Manager
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Jeff Buchbinder and Ryan Detrick discuss the bear market in the latest edition of the LPL Market Signals podcast. They also discuss inflation and the Fed. You can watch the full discussion below.
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