What to expect from this bear market based on history | personal financing

(Mark Blank)

This month, the stock market entered bear market territory for the first time since March 2020. It does not appear that it will recover as quickly as the last bear market, which only lasted two months.

Bear markets are defined as a market decline of at least 20%, which is simply the cost of doing business for investors. Since they are unavoidable, it is useful to study past bear markets to see what we can expect.

Let me be clear: No two bear markets are alike, and the past is definitely not an indicator of what the future holds. But we also know that history has patterns, and studying those patterns can provide some valuable insights for investors in the long run.

Image source: Getty Images.

Bear markets are normal

Despite the ominous comments about this latest bear market, a fall of 20% is perfectly normal, even healthy.

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Dating back to 1928, there were 28 bear markets, which means we can expect a market about every five years. Understanding this is very important for investors. Rhetoric about bear markets usually goes along with “this is the worst we’ve ever seen” or “the outlook is bleak,” but investors should remember that negative headlines sell.

Consider some of these headlines that frighten past bear markets:

  • “Death of Stocks” – 1979
  • “Amazon.bomb” – 1999
  • “The financial crisis is the worst the world has ever faced” – 2008
  • “Stock markets see biggest drop since 2008 as virus fears spark panic selling” – 2020

However, since that infamous “Death of Stocks” story in 1979, the Standard & Poor’s 500 Gain amazing 10,000% (profits reinvested). Oh, and since the “Amazon.bomb” show, Amazon (NASDAQ: AMZN) over 4000%.

If you are investing over 50 years, you can expect to see 14 bear markets. Trying to navigate them is futile, and very risky given the long-term return potential as described above.

If you are going to be a successful long-term investor, you need to learn to accept bear markets and stay on track.

Typical length of a bear market

An average bear market lasts about 10 months, while a typical bull market lasts more than 2.5 years.

The word “average” should be noted. The length of bear markets varies depending on various factors. For example, if a bear market is accompanied by a recession, it tends to last significantly longer.

But even so, this is far from a perfect indicator of the length of a bear market. In 2020, our economy technically entered a recession for a while, yet the accompanying bear market only lasted for two months.

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

The moral of the story is: Don’t try to predict how long a bear market will last based on current economic expectations. Just know that it won’t last forever, and the bull market that follows is likely to be much longer.

How long does it take for stocks to recover

Many investors make the mistake of waiting for the economy to recover before considering buying stocks. The stock market is a forward-looking mechanism and does not usually wait for the economy to show signs of recovery before going up.

While the market typically takes about 19 months to recover to its previous all-time highs, waiting for that to happen is a huge mistake. Some of the best days in the market happen quickly after entering bear market territory.

The greatest investor of all time, Warren Buffett, He said this after the 2008 market crash: “In the early ’80s, it was stock-buying time when inflation was raging and the economy was in a tank… In short, bad news is an investor’s best friend.”

The data supports this as well.

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 it entered a bear market. So, sitting on the sidelines until the economy appears healthy again can result in significant gains being lost.

Conclusion: just keep swimming

Looking at previous bear markets can be helpful in calming one’s nerves, but not in anticipating a “bottom”. Historical data paint a picture of both unpredictability and uncertainty.

The length and severity of a bear market cannot be predicted. But we can be sure knowing that it will eventually come to an end, and that continuing to buy through a bear market will do a better portfolio performance than waiting on the sidelines.

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John Mackie, CEO of Whole Foods Market, an Amazon company, is a member of The Motley Fool’s Board of Directors. Mark Blanc He has no position in any of the mentioned shares. Motley Fool has and recommends positions at Amazon. Motley Fool has a profile Disclosure Policy.