How Bad Can Bear Markets Get?
Lessons from history on how long markets take to recover, and what investors should do
A few years ago, while tenting in Ontario’s beautiful Algonquin Provincial Park, I woke to the sound of clattering coming from our nearby cooking shelter, a mesh covering around a picnic bench, with our cooking implements. I looked out to see a black bear that had destroyed the shelter’s mesh and was standing on the picnic bench sniffing around our Coleman stove. I grabbed a can of bear spray (of course I had bear spray — I’m risk-averse!) and quietly woke my wife to let her know what was happening. As she looked out the tent window, she was face to face with the bear, who was circling our tent, with nothing but some thin nylon in between. What’s it like to be in bear territory? It’s scary!
What is a Bear Market?
Stock market bear territories can be scary as well. A bear market is generally considered to be one where a broad market index, like the S&P 500 index in the U.S., declines by more than 20 percent from a previous highwater mark. That’s what happened on June 10, 2022 when the S&P index closed at a level of 3,749.63, down 21.8 percent from a recent high of 4,796.56 on January 3, 2022. As of June 10, 2022, we consider the S&P 500 to be in bear territory. Bear markets are often associated with uncertain economic climates and pessimistic investor sentiment.
The 20 percent decline is an arbitrary amount meant to capture a substantial loss in stock value. It’s important to note that those losses aren’t “real” unless an investor happened to start investing in the S&P 500 on January 3, 2022, and then sold everything on June 10, 2022. If you invested prior to the peak, then your current “paper” loss would be less than 20 percent. Losses don’t become realized until you actually sell. Another consideration: the decline in the price level excludes some offsetting benefits of dividends.
How Bad Do They Get?
Let’s take a walk through the past to see how bad bear markets can be. S&P 500 data back to 1928 are available through Yahoo!Finance. According to my analysis, we have just entered the 14th bear market. The following table shows the peak dates and associated levels of the S&P 500…