8 Facts You Need to Know About Bear Markets
There are few things scarier to an investor than bear markets.
There are few things scarier to an investor than bear markets. But they are a fact of life. Just as in physics, what goes up must come down.
The good news is that the long-term trend of stocks is upward, so patient long-term investors (and you shouldn't be anything else if you invest in stocks) can usually wait a bear market out – as long as they're diversified in accordance with their age, stage in life and tolerance for risk.
Have a look at these eight facts about bear markets. The more you know, the better you can set yourself up to navigate the rest of the current bear market ... and prepare yourself for future bears to come.
Why They Call It a Bear Market
It has nothing to do with the way bears sneak up on their prey and attack suddenly, in the same way that bear markets feast on investors. Neither is it because bears are notorious for ransacking campsites and stealing provisions, in the same way bear markets can destroy your financial well-being.
Though both would be fitting.
Believe it or not, the term "bear market" originates with pioneer bearskin traders. The country's early traders would sell skins they'd not yet received – or paid for. Because the traders hoped to buy the fur from trappers at a lower price than what they'd sold it for, "bears" became synonymous with a declining market.
There is, however, an alternative explanation, according to Wall Street lore: A bear attacks by swiping its claws downward, similar to the downward trend of a declining market.
What Is a Bear Market, Anyway?
First, let's look at what a bear market is not.
It's not when stock prices end lower in the majority of trading days within a 90-day period. Neither is it a condition proclaimed by the National Bureau of Economic Research. And it is certainly not when at least two major business publications proclaim a bear market on their magazine covers.
Rather, a bear market is when a broad market index, such as the S&P 500, falls 20% or more from its peak.
There still is some debate among market watchers about whether the downturn that lasted from July 16 to Oct. 11, 1990, was officially a bear. The S&P fell 19.9% during that period. And the 2018 correction that lopped 19.8% off the S&P 500 was within rounding distance of a bear market. The average bear-market decline in the S&P 500, since 1929, is 39.9%, according to S&P Dow Jones Indices.
How Often Bear Markets Occur
Since 1932, bear markets have occurred, on average, every 56 months (about four years and eight months), according to S&P Dow Jones Indices.
Our current bear market started at the Feb. 19 closing peak of 3,386 for the S&P 500. However, it wasn't made official until the March 12 close, when the benchmark found itself off 27% from the February high-water mark.
The LEAST Likely Cause of a Bear Market
A number of events can lead to a bear market: higher interest rates, rising inflation, a sputtering economy and military conflict or geopolitical crisis are among the usual suspects. But which is the rarest?
Fortunately, military or geopolitical shocks to the market have been mostly fleeting. Two of the longest downturns followed the attack on Pearl Harbor in 1941 (308 days) and Iraq's invasion of Kuwait in 1990 (189 days).
But the average time to the market bottom after such events, which also include the terrorist attacks on the U.S. in 2001 and the North Korean missile crisis of 2017, is 21 days, with a full recovery in 45 days, on average.
Bear Markets Don't Always Follow Recessions
Indeed, bear markets usually precede economic downturns.
Since 1948, eight of 11 bear markets have been followed by recessions. In one case, the start of the recession came at roughly the same time as the market's peak; the longest wait was 12 1/2 months.
The average time between a peak and the onset of recession is seven to eight months, according to InvesTech Research.
The Worst Bear Market of All Time
Contrary to popular belief, the worst bear market on record was not the the 2007-09 crash when the financial crisis ushered in the Great Recession. Neither was it the tech wreck of 2000 when dot-com stocks collapsed. The drawn-out decline from the start of 1973 through the fall of 1974 – during which the Arab oil embargo sent oil prices soaring, the so-called Nifty-Fifty stocks sank, and Richard Nixon resigned the presidency – doesn't take the cake either.
Rather, the bear market that began just ahead of Black Monday that precipitated the Crash of 1929 was the worst one to date.
The bear market from September 1929 to June 1932 resulted in an 86.2% loss for the S&P. The others aren't even close, with losses of 56.8% in 2007-09, 49.1% in 2000-02 and 48.2% in 1973-74. After the 1929-32 slump, stocks did not regain their prior peak until 1954.
How Long Bear Markets Last
Some folks guess that it's a year or less. Other figure it's a minimum of two years. Regardless of length, it usually feels like forever.
The average since 1929, however, is 21 months, according to S&P Dow Indices. If the average holds true this time around, we still have a long way to go before stocks resume their long-term uptrend.
Good and Bad Investments for Getting Through a Bear Market
What's the best investment for a bear market? Is it U.S. Treasury bonds? Or perhaps gold or gold funds? How about classically defensive plays including utilities, consumer staples companies and health care companies? Or perhaps the highest-growth stocks with the broadest following?
When stocks are in free fall and worries about the economy abound, there's nothing more soothing than the full faith and credit of the U.S. government. And a "flight to quality" often leads to gains in U.S. Treasury bonds. In 2008, the Bloomberg Barclays US Aggregate Bond Index – a broad-based, high-quality fixed-income benchmark – gained 5%, making it the only U.S. financial asset in the black that year.
Defensive stocks will lose ground in a bear market, but tend to lose less than average, supported by steady demand for their products and, often, generous dividends. Gold, which Kiplinger recommends as a portfolio diversifier only in small amounts, often zigs upward when stocks zag downward.
As for the worst place to hide out in a bear market, it's the highest-growth stocks with the broadest following. Indeed, these stocks can be among the worst performers in a bear market if their popularity led them to have outsized gains before everything collapsed. The higher they fly, the harder they fall.