What to Expect from a History-Based Bear Market | Personal Finance

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

Bear markets are defined as a market decline of at least 20%, and they are simply the cost of doing business for investors. Since they are inevitable, it is helpful to study past bear markets to see what we can expect.

Let me be clear: no two bear markets are alike, and the past certainly doesn’t predict the future. But we also know that history has patterns, and studying those patterns can provide some valuable insights for long-term investors.

Image credit: Getty Images.

Bear markets are normal

Despite the pessimistic comments on the recent bear market, a 20% pullback is completely normal, even healthy.

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Going back to 1928, there have been 28 bear markets, which means we can expect them to happen roughly every five years. Knowing this is extremely important for investors. The rhetoric surrounding a bear market is often “this is the worst we’ve seen” or “the future is bleak,” but investors should remember that negative news is short selling.

Consider some scary headlines from past bear markets:

  • “Death of Stocks” – 1979
  • “Amazon Bomb” – 1999
  • “The financial crisis is the worst crisis in the world” – 2008
  • “Stocks post biggest drop since 2008 as virus fears spark panic selling” – 2020

However, since the infamous “Death of Stocks” story in 1979, S&P 500 Returned an amazing 10,000% (dividend reinvested). Oh, since the “Amazon.bomb” piece, Amazon (NASDAQ: AMZN) up 4,000%.

If your investment horizon exceeds 50 years, you can expect to see 14 bear markets. Given the long-term return potential shown above, trying to get around them is futile and risky.

If you’re going to be a successful long-term investor, you need to learn to embrace bear markets and stick with them.

Typical length of a bear market

The average duration of a bear market is about 10 months, while a typical bull market lasts more than 2.5 years.

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

But even so, it’s far from a perfect predictor of the length of a bear market. In 2020, our economy technically entered a brief recession, but the ensuing bear market lasted only two months.

The recession of the early 2000s was also short and fairly mild by comparison, but the subsequent bear market lasted 929 days, one of the longest in history.

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

How long it will take for the stock market 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 that typically doesn’t wait for signs of economic recovery before rising.

While it usually takes about 19 months for the market to recover to previous all-time highs, waiting for that to happen would be a big mistake. After entering bear market territory, some of the best days in the market can happen quickly.

Warren Buffett, the greatest investor of all time, said after the market crash in 2008: “In the early 1980s, the time to buy stocks was at a time when inflation was raging and the economy was struggling… In short, bad News is an investor’s best friend.”

The data also supports this.

Half of the S&P 500’s best trading days have occurred in bear markets, with the market gaining an average of 15% 12 months into the bear market. So sitting on the sidelines until the economy looks healthy again could result in missing out on huge gains.

Conclusion: keep swimming

Looking back at past bear markets can help calm sentiment, but cannot predict a “bottom.” Historical data paints a picture of unpredictability and certainty.

The length and severity of bear markets are unpredictable. But we can be sure that it will eventually come to an end, and continuing to buy in a down market will lead to better portfolio performance than waiting.

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John Mackey, CEO of Amazon subsidiary Whole Foods Market, sits on The Motley Fool’s board. Mark Blank has no positions in any of the stocks listed above. The Motley Fool has jobs on Amazon and recommends Amazon. The Motley Fool has a disclosure policy.


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