In markets, the terms “bull” and “bear” refer to optimists and pessimists. While the terms come to us from early 18th century Britain, their use to describe more sustained upward/downward movements as bull and bear markets didn’t really become common until the late 1950’s. Stocks are considered to have entered a “bear market” when widely followed indexes such as the S&P 500 or the NASDAQ sink 20% from their most recent high points. It is not an official designation, rather it’s a way for market participants to mark when markets have taken a tumble…and tumble they have.
As of the end of last Friday (5/20) the Dow industrials posted their eighth straight weekly loss, the longest streak since the Great Depression (1932). The S&P 500 and Nasdaq had their seventh straight weekly loss, their longest such streak since the bursting of the dot-com bubble (2001). The sell-off has been broad and deep as investors grapple with a confluence of issues - a shift in interest rates, supply chain snarls, inflationary pressures, and geo-political challenges.
However, investors would do well to keep some perspective about how markets behave, particularly when it comes to bear markets.
Characteristics of bear markets:
- They are an inescapable feature of investing. In fact, without them, there would be no bull markets.
- They are normal – there have been 26 of them since 1928 (roughly one every 3.6 years). There have been 27 bull markets across that same time span.
- They tend to be short in duration – the average length is 298 days. Meanwhile, bull markets average length is 991 days. In other words, over the last 92 years investors experienced bear markets roughly 20% of the time, while enjoying bull markets roughly 78% of the time.
- Some of the best days in the market occur during a bear market (miss just a few of those and the negative impact to long term returns can be significant).
S&P 500 Index declines of 20% or more, 1929–2021
Source: Ned Davis Research, 12/21.
Bear markets are inevitable, and predictable in how investors react to them. They tend to feel terrible and eventually many investors give up and sell. When things look the worst, and most investors finally “capitulate” it often marks a turning point, and the green shoots of the next bull market are born.
It can be difficult to weather the storm, and ride it out, but long-term benefits await the disciplined investor who can do so.
Source: Morningstar
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