If you've ever been on a road trip with kids, you've probably heard the inevitable question: Are we there yet? Even adults like to know how far away they are from their destination.
This same sentiment is true with the current stock market pullback. Most investors know that stocks will bounce back sooner or later. And they'd love to know how far into the future the rebound will happen.
How long will this bear market last? Unfortunately, there's no clear answer. However, we can gain some perspective by looking at historical market downturns.
Market declines of the past
Significant declines aren't unusual for the S&P 500. They happen regularly at varying levels of intensity.
The worst type of market decline is a bear market, which is defined as a period where the market plunge by 20% or more from the most recent high. Stock market corrections are more common. They occur when stocks sink at least 10% (but less than 20%).
Bear markets tend to last longer than corrections do. The longest bear market for the S&P 500 occurred during the Great Depression and lasted 2.8 years. Since the 1950s, the longest bear market was in the early 2000s when the dot.com bubble burst. It lastest 2.1 years.
The S&P 500 slipped into bear market territory on Friday — but just barely (no pun intended). It could quickly revert back to a correction. Most corrections don't result in full-blown bear markets. The ones that don't sometimes last only a few weeks. Others can go on for months. However, corrections only rarely last for more than a year.
The closest cousin
No market correction is exactly alike. However, they sometimes are similar in several respects.
The current S&P 500 sell-off appears to be primarily due to two related factors. Inflation is soaring, driven by coronavirus-related supply chain issues and high fuel prices resulting in part from Russia's invasion of Ukraine. Interest rates are also rising as the Federal Reserve attempts to keep inflation under control.
These aren't the same underlying issues that were present during the lengthy bear market in the early 2000s. Probably the most significant common denominator between the current sell-off and the steep decline back then is that both followed long roaring bull markets.
Arguably the closest cousin to today's S&P 500 decline is the bear market that began in late 1980. It lasted for 622 days, ending in August 1982. Led by Paul Volcker, the Federal Reserve cranked up interest rates relentlessly to fight skyrocketing inflation. The current chairman of the Federal Reserve, Jerome Powell, recently made a Volcker-like commitment to continue raising interest rates until inflation levels subside.
Lessons from history
It's possible that the S&P 500 will enter a bear market that extends into late 2023 based on what's happened in the past. However, some economists think that inflation will ease downward this year.
If so, the Fed isn't likely to raise interest rates anywhere close to the levels seen during the early '80s bear market. That could mean that this bear market could be a relatively short one that ends later this year.
Regardless of how long the current stock market sell-off lasts, there are clear lessons that investors can learn from history. Most importantly, even steep downturns are only temporary. Selling all your stocks is usually ill-advised because you could miss the inevitable rebound.
Actually, the smartest strategy for market downturns based on what has happened in the past is to buy solid stocks and index funds as they're falling. Doing so should set you up for even greater long-term returns.
Perhaps the best answer to the question of when the stock market sell-off will end is the same one you've probably told your kids on road trips: “We're not there yet, but we're getting closer.”
10 stocks we like better than Walmart
When our award-winning analyst team has an investing tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now… and Walmart wasn't one of them! That's right — they think these 10 stocks are even better buys.
Stock Advisor returns as of 2/14/21
The Motley Fool has a disclosure policy.