A Bear Market History Lesson

History has shown that bear markets are an unavoidable, if unwelcomed, aspect of investing. In fact, they’re quite common. There have been nine bear markets since 1950, not including the one that began in October 2007. They last an average of about 13 months but have been known to range anywhere from 101 days to more than 600 days.

The common definition of a bear market is a 20% decline in stock prices (often measured by the S&P 500 stock index) from a previous high point. The ending date of a bear market cannot be determined until a new bull market has been identified. A bull market is commonly defined as a 20% increase in prices from the beginning of the most recent bear market.

Bear markets can be painful for investors. However, looking at the characteristics of previous bear markets and the recoveries that followed may help you not only keep current market conditions in perspective, but avoid emotional decision-making that could possibly be more harmful in the long run.

Sizing Up This Bear
Each bear market seems to have its own personality, stemming from a unique set of root causes. The bear market that began in October 2007 may differ from previous ones because of systemic uncertainty caused by a broader credit crisis.2 The credit markets seized up after some subprime loans that were repackaged and sold to investors began to default. This caused some lenders to become fearful, which then imperiled businesses that need to borrow money to finance their operations. An old saying advises us that it takes money to make money, and in the U.S. economy, it often takes borrowed money to make money. When the ability to borrow is limited, it can interfere with a company’s earnings, which directly affect its stock price.

Add in the unprecedented steps taken by the federal government to aid the private sector during the credit crisis, the uncertainties created by a closely watched presidential race, and the approaching expiration dates of several favorable tax laws, and it’s easy to see that bear markets can be caused, prolonged, or otherwise influenced by a range of real-world events.

Looking Back at Previous Bears
If you’re going to be a long-term investor, it’s a good idea to expect bear markets and to be prepared for them. If it seems as though the sky is falling right now, it wouldn’t be the first time. To gain perspective, consider the history of bear markets.

In the nine bear markets since 1950, stock prices declined an average of 32%. In the 10 bull markets (since June 13, 1949), stock prices grew an average of 161%.3
Since 1950, the average bear market has lasted 400 days. However, four bear markets ended in less than one year and five lasted longer than one year. By contrast, the average bull market lasted 1,770 days. Only one lasted for less than two years, and seven lasted longer than three years.4
If you had invested $10,000 in a portfolio of stocks mirroring the S&P 500 on January 31, 1950, the portfolio would have grown to more than $6.5 million by December 31, 2007. During this period, the S&P 500 index returned an average of 11.84% per year.5 Of course, this period is much longer than the time over which the average investor prepares for retirement, but the point is that despite several long and sometimes nasty bear markets, stock values have risen over the past 57 years. Of course, past performance is no guarantee of future results.
Ready for the Bear’s Bounce?
Clearly, it is not possible to forecast exactly when a bear market will end, but if history is any guide, stock prices may begin to move upward again. Considering that the most recent bear market began in October 2007, it might be sooner rather than later.6 Moreover, past performance suggests that investors may eventually benefit from a post-bear bounce that could possibly be significant. Historically, in the first 40 days following a bear-market bottom, the stock market has gained an average of 33%.

As difficult as it is to continue investing regularly in stocks in the midst of a bear market, there are some compelling reasons to do so. Stocks have historically offered the best chance for returns that will beat inflation over the long term. Furthermore, many successful investors will tell you that when stocks are out of favor, it can be a good time to buy. When prices are down, you may be able to accumulate more shares at a lower cost. Finally, if you are investing for a long-term goal more than five to 10 years down the road (such as retirement), you will likely have time to recover from a market setback.

The return and principal value of stocks and bonds fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost.

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