Uncertainty with inflation, continued economic growth, geopolitical unrest, and rising interest rates have the financial markets uneasy. Most market participants are anxious to see whether the Federal Reserve has the tools to tame inflation while avoiding a recession. As such, the S&P 500 Index, which is the most widely followed barometer for the U.S. stock market is currently down over 15% on the year while the Russell 2000 Index, which follows smaller company stocks is down over 20%. With the recent weakness and threat of recession, we look to past market cycles to try to gain some insight into what investors might expect moving forward.
A stock bear market is typically defined by stocks trading down more than 20% from its highs. At this point, we cannot officially call this a bear market for the S&P 500, but the Russell 2000 has entered this territory. Looking back over the history of the market (as can be seen from a chart supplied by Dimensional Fund Advisors), there have been 17 “bear” markets since 1926, using monthly data on the S&P 500.
Bear Markets since 1950 from the chart above (source: Dimensional Fund Advisors):
Approximate Year Downturn Duration
1962 -22% 6 months
1970 -29% 19 months
1974 -43% 21 months
1987 -30% 3 months
2001 -36% 12 months
2002 -31% 4 months
2008 -51% 13 months
2009 -27% 2 months
2020 -34% 1 month
We must keep in mind that bear markets are normal in a well-functioning financial market. Most bear markets are short-lived, with an average of 9 months since 1950 (from the chart above) but this is not very comforting as we experience them. The issue is that although the average length is short, they have varied quite a bit in length, historically. Therefore, it is very difficult to predict how much of a pullback there will be in a current bear market and how long it will last. This is usually only known once they have passed.
Although these bear markets have had different catalysts and the downturns vary dramatically, the emotions we experience as investors are similar. Uncertainty abounds and there is a natural urge to make changes in portfolios. However, we continue to believe the discipline of sticking to a long-term investment plan is the best path forward. As we work our way through the current market environment, we will continue to rebalance portfolios to our long-term strategic targets using our disciplined approach to investing. We believe that over the long-term investors should be rewarded for taking risk.
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