Bear markets are periods when the stock market declines by 20% or more from a recent peak (a 52-week high, for example). Using the S&P 500 Index as a measure, there have been 16 bear markets since 1926, averaging once every six years. They last an average of 22 months, and the market loses an average of 39%.
According to thebalance.com, these are the things about stock bear markets and their subsequent recoveries.
Historic Market Tumbles
The most recent U.S. bear market started amid the new coronavirus outbreak of 2020. The stock market crashed in March, with the Dow Jones Industrial Average and the S&P 500 Index both falling more than 20% from their 52-week highs in February.
Other bear markets, as measured by the S&P 500, include the year 2007-2009 down 59% over 27 months, 1973-1974 down 48% over 21 months, and 1929-1932 down 86% over 34 months.
For investors who sold at the bottom of these markets, these down times had a detrimental effect. Of course, those who stayed in long enough to experience a subsequent recovery were better off.
As a suggestion, remaining focused on the long-term is important when in the middle of a bear market.
Recovering From a Bear Market
In the year after the “trough” of the bear markets since 1929, the S&P 500 has gained an average of 47%, according to a March 2020 report from Fidelity Investments.
For instance, In 2008, the S&P 500 bottomed at 683 on March 9, 2009, after declining 59%. From there it began a remarkable ascent, roughly doubling in the following 48 months.
Investors who are considering moving entirely out of stocks during bear market declines might want to re-consider such action, since properly timing the beginning of a new bull market can be challenging.
Investing during a Bear Market
If you have cash, considering buying opportunities during a bear market. Historically, the S&P 500 Price to Earnings Ratio (P/E) has been notably lower during bear markets. When investors are more confident, the P/E ratio typically increases, making stock valuations higher.
Professional investors love bear markets because stock prices are considered to be “on sale.”
As a rule of thumb, set your investment mixture according to your risk tolerance and re-balance in order to buy low and sell high. Never cut contributions to retirement accounts during down markets. In the long run, you will benefit from buying new shares at lower prices and will achieve a lower net average purchase price.
