What to Expect from This Bear Market Based on History

This month, the stock market entered bear market territory for the first time since March 2020. And it doesn’t feel like it will recover nearly as quickly as the last bear market, which lasted only two months.

Bear markets are defined as a drop in the market of at least 20%, and they are simply the cost of doing business for investors. Since they are unavoidable, it’s helpful to study the past bear markets to learn what we can expect.

Let me be clear: No two bear markets are alike, and the past is certainly not an indication of what the future holds. But we also know that history has patterns, and studying those patterns can provide some valuable insights for long-term investors.

Image source: Getty Images.

Bear markets are normal

Despite doom-and-gloom commentary about this latest bear market, 20% pullbacks are perfectly normal, and even healthy.

Dating back to 1928, there have been 28 bear markets, which means we can expect one about every five years. Understanding this is extremely important for investors. The rhetoric around bear markets usually goes along the lines of “this is the worst we’ve ever seen” or “the future outlook is bleak,” but investors should remember that negative headlines sell.

Consider some of these fear-mongering headlines from past bear markets:

“The Death of Equities” — 1979
“Amazon.bomb” — 1999
“Financial Crisis is the Worst the World Has Ever Faced” — 2008
“Stock markets in biggest fall since 2008 as virus fears trigger panic selling” — 2020

And yet, since that infamous “Death of Equities” story in 1979, the S&P 500 has returned an astounding 10,000% (dividends reinvested). Oh, and since the “Amazon.bomb” piece, Amazon (NASDAQ: AMZN) is up 4,000%.

If you’re investing over a 50-year period, you can expect to see 14 bear markets. Trying to navigate around them is futile, and quite risky considering the long-term return potential as shown above.

If you’re going to be a successful long-term investor, you need to learn to accept bear markets and stay the course.

The typical length of bear markets

The average bear market lasts approximately 10 months, while the typical bull market persists for over 2.5 years.

The word “average” should be noted. The length of bear markets varies depending on different factors. For example, if the bear market is accompanied by an economic recession, it tends to last significantly longer.

But even then, that is far from a perfect predictor of bear market length. In 2020, our economy technically entered a recession for a brief moment, and yet the accompanying bear market lasted only two months.

By contrast, the recession of the early 2000s was also short-lived and fairly mild, and yet the ensuing bear market lasted 929 days, one of the longest in history.

The moral of the story is: Don’t try to predict how long the bear market will last based on the current economic outlook. Just know it will not last forever, and the bull market that follows will likely be much longer.

Time it takes for stocks to recover

Many investors make the mistake of waiting for the economy to recover before looking to buy stocks. The stock market is a forward-looking mechanism and typically doesn’t wait for the economy to show signs of recovery before going up.

While it typically takes around 19 months for the market to recover to its previous all-time highs, waiting for this to happen is a big mistake. Some of the best days in the market happen quickly after entering bear market territory.

The greatest investor of all time, Warren Buffett, said this after the 2008 market crash: “In the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank… In short, bad news is an investor’s best friend.”

The data backs this up too.

Half of the S&P 500’s best trading days have happened in bear markets, and on average the market is up 15% 12 months after entering a bear market. So, sitting on the sidelines until the economy looks healthy again can result in big gains being missed.

Conclusion: Just keep swimming

Looking to past bear markets can be helpful in calming one’s nerves, but not in predicting “the bottom.” Historical data paints a picture of both unpredictability and certainty.

The length and severity of a bear market is wildly unpredictable. But we can have certainty in knowing it will come to an end eventually, and that continuing to buy through the down market will result in better portfolio performance than waiting on the sidelines.

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