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History of Bull & Bear Markets & What Investors Should Consider for Their Portfolio

History of bull and bear markets

Behavioral science tells us current events have a greater impact on our perception and decisions than the past. In 2022, investors are facing with extreme uncertainty given record inflation and recession fears. The stock market is pricing in that uncertainty, leaving investors to wonder if this is the start of a long-term trend.

Taking a look at the history of the S&P 500's performance can provide insight on what's happened during past market downturns and recoveries. Although stocks rise and sometimes fall for quarters and occasionally even years, they’ve tended to reward investors over longer periods of time.

The Rise of the S&P 500 Since 1942

Looking at the history of S&P 500 since 1942, the average bull market lasted 4.4 years with an average cumulative total return of 154.9%, while the average bear market (a drop of 20% from peak) lasted just 11.3 months, with an average cumulative loss of -32.1%1.

Source: First Trust. Data from 4/29/1942-3/31/2022. History of U.S. Bear & Bull Markets While today’s challenges certainly warrant caution, they shouldn't be a reason to cause panic, especially when you're focused on long-term investing.

Since 1942, markets have experienced numerous challenges including multiple wars, an oil embargo, asset bubbles, the Great Recession and a global pandemic. Through each of these challenges, companies and people adapted and responded in order to get things back on track.

Investing will always be uncertain. That's why working with a financial planner to create and stick to a thoughtfully constructed investment plan is critical to avoid making short-sighted decisions.

As Warren Buffet said, “the market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people”.

The Worst Years for US Stocks

Stock market losses occur for various reasons. Sometimes they are driven by excessive market valuations after an extended bull market. In others, they may be due to external events, such as a war or a pandemic. A look back at the worst years for US stocks provides perspective on how long a selloff can last and shows that even the worst years come to an end.

First the Bad News:

  • From 1928 - 2021, the S&P 500 had 25 negative years1. In other words, 73% of the time stocks had positive returns.

  • Of the 25 negative years since 1928, 11 of those were double-digit losses and mark the worst years1.

  • While rare, there have been eight times since 1928 of two consecutive years of negative returns.

  • Rarer still, there have been three instances of three consecutive years of negative returns and only once, during the Great Depression, when stocks fell four years in a row1.

And Now the Good News:

  • The longer-term returns after the worst years have historically been strong.

  • Historically, after the worst years, the average three-year historical return was +35%, while the average five-year return was 80%1.

  • While the results of the one-year period following the worst years are mixed, there was only one three-year period during the Great Depression with negative returns.

  • In the five-year period returns following each of these worst years, there were positive returns.

  • Even after the worst years for stock markets, the markets have always bounced back.

Source: Ben Carlson, A Wealth of Common Sense

What to Know About Bear Markets

Definition of a Bear Market

A bear market occurs when stocks fall 20 percent from a recent high. On Monday, June 13, 2022, the S&P 500 fell 22 percent from the last high set on January 3, 2022, thus officially entering a bear market in 2022.[i] Similarly, a bull market begins when the market gains 20 percent from market lows.

While no two bear markets are alike, we can review the history of bear markets to understand the potential positives and negatives that investors should understand once the market has crossed into this dreaded threshold.

Why Bear Markets Are Normal

Bear markets are normal and par for the course when investing. Since 1929, there have been 26 bear markets in the S&P 500 index.[ii] The average decline across these 26 bear markets has been almost 36 percent.[iii]

Using historical averages as a guide, investors may glean the pain isn’t necessarily over yet. However, averages are skewed by the worst bear markets, and not all bear markets are created equal.

Do Bear Markets Lead to Recessions?

The most painful bear markets are often associated with an economic recession. However, bear markets and recessions do not always coincide.

Since 1929, of the 26 bear markets, only 15 were tied with recessions.[iv] Research by Ned Davis using the Dow Jones Industrial Average (DJIA) from 1900 through the present shows bear markets associated with recessions had an average decline of nearly 35%, while bear markets without a recession experienced an average loss of 25%.[v]

While bear markets often go hand-in-hand with a slowing economy, a recession as a result of a bear market is not necessarily a foregone conclusion.

How Long Do Bear Markets Last?

Bear markets have been short-lived. Since 1929, the average length of a bear market in the S&P 500 index is 289 days or about 9.6 months.[vi] Once again, the averages are skewed by the worst bear markets.

According to Ned Davis’ research, bear markets associated with recessions lasted 353 days while bear markets without a recession lasted 206 days.[vii]

Bear markets, while short-lived in comparison to bull markets, feel longer due to loss aversion. Loss aversion--a behavioral finance term--tells us losses hurt twice as much as gains feel good. While it's true that bear markets are often volatile and can happen quickly, bull markets happen over time and build wealth slowly.

Markets Are Positive Most of the Time

Despite the bear market stigma, markets are positive the majority of the time. Since 1929, we have had 92 years of market history. Bear markets have comprised only 20.6 years of that 92-year period.

In other words, stock markets generate gains 78 percent of the time.[viii]

What Investors Should Consider When it Comes to Their Portfolio

Investors who consider selling before compounding additional losses and waiting for the "all-clear" signal should know half of the S&P 500 index’s strongest days in the last 20 years occurred during a bear market. Another 34 percent of the best days occurred shortly after the end of the bear market.[ix]

While the time to recovery varies, the S&P 500 has come back from every one of its prior bear markets to eventually rise to another all-time high. It's extremely difficult to predict when markets will rebound, which is why I often say, "It's about time in the market, versus timing the market."

Investors who remain disciplined during a market downturn are likely to avoid common pitfalls and potentially enjoy better times ahead. Historically, the longer you stay invested, the greater the possibility of meeting your long-term goals.

It's still ok to feel nervous, however. It's at times like these that it's helpful to talk to a financial planner who can help you identify and address your concerns and help you make the right decision for your portfolio.

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Sources [1]

[i] FactSet [ii] Seeking Alpha: The complete history of bear markets [iii] Seeking Alpha: The complete history of bear markets [iv] NBER, Seeking Alpha: The complete history of bear markets [v] Ned Davis Research: A History of Bear Markets II: Dow Jones Industrial Average (1900-6/13/2022) [vi] Seeking Alpha: The complete history of bear markets [vii] Ned Davis Research: A History of Bear Markets II: Dow Jones Industrial Average (1900-6/13/2022) [viii] Hartford Funds: 10 Things to know about Bear Markets [ix] Hartford Funds: 10 Things to know about Bear Markets


The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

104203 | C22-18868 | 06/2022 | EXP 06/30/2024

103305 | C22-18578 | 05/2022 | EXP 05/31/2024

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