Putting A Bear Market into Perspective

By: Wayne Duggan

The 1,400-point drop (read: 9 percent) in the Dow Jones Industrial Average last week once again has people worried that a bear market is imminent. But enough with the doom and gloom. While there are stocks that qualify as being in a correction, the broad indices have not yet reached that 20 percent threshold. And even if they had, corrections are completely normal.

Considering it’s been roughly a decade since the last correction in U.S. stocks, let’s take a look back at the previous U.S. bear markets.

What Does History Say About Bear Markets?

There hasn’t been a bear market in U.S. stocks in a long time, but they have occurred very regularly throughout history. According to Guggenheim, since 1945, there have been 78 instances of stock market declines of between 5-10 percent, 27 corrections of between 10-20 percent, and 8 bear market drops of greater than 20 percent.

The good news for long-term investors is that the stock market has historically been extremely resilient and has always eventually made it back to where it was prior to the drops. In fact, the S&P 500 has taken an average of only about one month to recover from declines of 5-10 percent, three months to recover from pullbacks of between 10-20 percent and 15 months to fully recover from typical bear market declines of 40 percent or less.

There have only been three instances of bear market declines of greater than 40 percent. In those three cases, the market has taken an average of 58 months (nearly five years) to fully recover.

Bull Markets Versus Bear Markets

According to this wonderful graphic from First Trust, there have been nine U.S. bull markets since 1926 separated by eight bear markets. The average bull market lasted 9.1 years and resulted in an average gain of 480 percent from the previous bear market bottom.

To put that in perspective, the bull market of this decade is above that average duration at 9.6 years yet below the average in terms of cumulative return, at just a 384 percent gain.

On the other side, the eight bear markets since 1926 have averaged 1.4 years in duration and resulted in an average decline of 41.1 percent from previous bull market highs. As of last week’s close, the S&P 500 had only declined about 10 percent.

Keeping A Healthy Outlook

It’s understandable why people are worried about a drop in stocks. For many, the scars from 2008 have not yet healed. And for younger investors, a bull market is all they’ve ever known.

Yet for all the pain that was felt during The Great Recession, it also reinforced the importance of having a long-term mindset in your investment portfolio. Could we keep going down in 2019? Absolutely. But eventually, the bears will get tired and go into hibernation and the bulls will come out of hiding. That’s just the way the market works.


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