What to expect from this historically based bear market

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

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

Let’s be clear: no two bear markets are the same, and the past is certainly no indication of what the future holds. But we also know that history has patterns, and studying those patterns can provide valuable insights for long-term investors.

Image source: Getty Images.

Bear markets are normal

Despite the dire comments in this latest bear market, pullbacks of 20% are perfectly normal, even healthy.

Since 1928, there have been 28 bear markets, which means we can expect one about every five years. Understanding this is extremely important for investors. The rhetoric around bear markets usually goes along the lines of “this is the worst we’ve ever seen” or “the outlook for the future is bleak”, but investors should remember that negative headlines sell.

Consider some of these scaremongering headlines from past bear markets:

  • “The Death of Stocks” — 1979
  • “Amazon.bomb” — 1999
  • “The financial crisis is the worst the world has ever known” – 2008
  • “Stock markets see steepest fall since 2008 as virus fears trigger panic selling” – 2020

And yet, since that infamous story of the “death of stocks” in 1979, the S&P500 brought in an incredible 10,000% (dividends reinvested). Oh, and from the piece “Amazon.bomb”, Amazon (NASDAQ: AMZN) is up 4,000%.

If you invest over a 50-year period, you can expect to see 14 bear markets. Trying to navigate around them is futile and quite risky given the potential long-term return, as shown above.

If you want to be a successful long-term investor, you have to learn to embrace bear markets and stay the course.

The typical duration of bear markets

The average bear market lasts about 10 months, while the typical bull market persists for more than 2.5 years.

The word “average” should be noted. The duration of bear markets varies depending on different factors. For example, if the bear market is accompanied by an economic recession, it tends to last much longer.

But even then, it’s far from a perfect predictor of bear market duration. In 2020, our economy technically entered a recession for a brief moment, and yet the accompanying bear market only lasted two months.

By contrast, the recession of the early 2000s was also short-lived and fairly mild, yet the ensuing bear market lasted 929 days, one of the longest in history.

The moral of the story is this: don’t try to predict how long the bear market will last based on the current economic outlook. Just be aware that this won’t last forever and the subsequent bull market will likely be much longer.

Time required for stocks 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 and generally does not wait for the economy to show signs of recovery to pick up.

Although it typically takes the market around 19 months to recover to all-time highs, waiting for that to happen is a big mistake. Some of the best days for the market happen quickly after entering bearish territory.

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

The data also confirms this.

Half of the S&P 500’s best trading days have occurred in bear markets and, on average, the market is up 15% 12 months after entering a bear market. So staying on the sidelines until the economy gets back to health can lead to the loss of significant gains.

Conclusion: Keep swimming

Watching past bear markets can be helpful in calming nerves, but not in predicting “the bottom”. Historical data paints a picture that is both unpredictable and certain.

The duration and severity of a bear market are extremely unpredictable. But we can be confident that it will eventually end, and that continuing to buy in the bear market will result in better portfolio performance than waiting on the sidelines.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. Mark Blank has no position in the stocks mentioned. The Motley Fool holds positions and recommends Amazon. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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