Investors who persevere through a bear market can earn substantial returns. Bear markets are times when the stock market drops 20% or more from its most recent peak (a 52-week high, for example). There have been a number of bear markets over the course of the S&P 500 Index's existence, as can be seen. The stock market has increased more often than it has decreased despite bear markets. The S&P 500 experienced up days in 53.7 percent of days and down days in 46.3 percent of days from 1950 to 2020. Positive days outnumbered negative days in every era.
Key Points
- An index of the stock market is said to be in a bear market if it shows a market decline of at least 20% from a recent peak.
- Bear markets usually recover and rise to higher levels, providing higher returns to those who have endured them.
- In general, bear market recoveries provide the highest returns based on time in the market.
- During a downturn, you should not reduce your contributions to your retirement accounts.
What Is the Cause of a Bear Market?
A variety of factors, including investor confidence, influence the prices of stocks and other securities; when investors lose faith in a stock's performance, whether due to the stock or backing company or to the economy's overall strength, the stock price tends to fall. When this happens repeatedly, it can lead to a wave of selling that lowers prices. To prevent losses, investors might sell their securities. In the most basic sense, what's happening is supply and demand. As a result, the entire market may experience price declines during periods of generalized recession or investor apprehension. The market is technically in bear territory when a specific index—whether it be the S&P 500, the Dow Jones, the Nasdaq, or another market—can measure a decline of more than 20 percent.Ancient Market Crumbles
The economy suffered following the COVID-19 pandemic's March 2020 arrival, and many investors expected a bear market to follow. The S&P 500 Index and the Dow Jones Industrial Average both fell more than 20% (more precisely, 33%) from their 52-week highs in February as a result of the stock market crash. The 2020 bear market, however, turned out to be only temporary. Since the March 2020 crash, the stock market has experienced solid gains; in 2021, the S&P posted a return of 26%. But the markets started to decline in 2022 slowly. On Jun. 13, the S&P 500 entered a bear market that was officially recognized, while the Nasdaq did so in April 2022. Other bear markets tracked by the S&P 500 include:- 2007-2009: a 57 percent drop in 1.4 years
- 2000-2002: a 49.1% drop in 2.5 years
- 1987: a 33.5 percent drop in 101 days
- 1980-1982: a 27.1 percent drop in 1.7 years
- 1973-1974: a 48 percent drop in 1.7 years
- 1968-1970: a 36.1 percent drop in 1.5 years
- 1966: a 22.2 percent drop in 240 days
- 1961-1962: a 28.0 percent drop in 196 days
- 1957: a 20.7 percent drop in 99 days
- 1948-1949: a loss of $20.6 over 363 days
- 1946: a 26.6 percent drop in 133 days
- 1940-1942: a 34.5 percent drop in 1.5 years
- 1939-1940: a 31.9 percent drop in 229 days
- 1938-1939: a 31.9 percent drop in 229 days
- 1937-1938: a 54.5 percent drop in 1.1 years
- 1934-1935: a 31.8 percent drop in 1.1 years
- 1933: a drop of 29.8 percent in 95 days
- 1932-1933: a 406 percent drop in 173 days
- 1930-1932: a drop of 83.0 percent in 2.1 years
- 1929: a 67-day decline of 44.7 percent
Getting Out of a Bear Market
Bear markets frequently come after bull markets. These are characterized by a rise in stock prices of at least 20%. Since 1930, there have been numerous bull markets. Although bull markets frequently last for years, the majority of the gains usually happen in the first few weeks of a stock market rally. In general, indexes have gained close to half of their prior highs in the years following the "troughs" of the bear markets throughout the history of the stock market. For instance, the S&P 500 gained 15% the following month and a total of 34% the following year after hitting bottom at 777 on Oct. 9, 2002, capping a 2.5-year bear market. After falling by 57 percent, the S&P 500 bottomed out at 676.5 on Mar. 9, 2009. It then started a remarkable rise that saw it roughly double in the ensuing 48 months. Investors who are thinking about completely exiting the stock market during a bear market decline may want to think twice about doing so because it can be difficult to predict when a new bull market will start. Those who choose to invest in cash during bear markets should think about the potential cost of missing the early stages of a market recovery, which historically have offered the highest percentage of returns per unit of time invested.Buying Stocks in a Bear Market
In a bear market, you might want to think about buying opportunities if you have cash. The price-to-earnings ratio (P/E) for the S&P 500 has historically been significantly lower during bear markets. The P/E ratio typically rises as investor confidence rises, rising stock valuations. Because stock prices are viewed as being "on sale," professional investors adore bear markets. Tip: As a general rule, balance your portfolio to buy low and sell high by adjusting your investment mix to match your risk tolerance. During bear markets, you shouldn't decrease your retirement account contributions. Long-term gains come from acquiring new shares at lower costs, which will result in a lower net average purchase price. Only the portion of your finances in retirement that you won't need for another five to ten years should be invested in stocks. The term "time segmentation" refers to the process of allocating capital in accordance with when you'll need it. You want a retirement strategy that lets you unwind and frees you from having to worry about daily, monthly, or even annual market fluctuations.Questions and Answers (FAQs)
What separates bull markets from bear markets?
When the stock market falls by 20% or more, there is a bear market, and when it rises by 20% or more, there is a bull market (much in the way bears are known to hibernate or withdraw, while a bull charges forward).In a bear market, should I sell my stock?
If you require specific guidance, speak with a financial advisor. Advice on investments should always be personalised based on your portfolio, goals, and level of risk tolerance. However, because markets go through cycles, many investors decide to wait them out and perhaps even profit from low prices, take the risk, and purchase more during bear markets.What happens at the end of a bear market?
Some investors consider it a good time to buy when prices are low, as they are during a bear market. Prices will begin to rise again, possibly stabilizing, as they do so. The market is constantly correcting itself, rising and falling as a result of supply and demand.