Stocks have struggled for direction since falling into a bear market earlier this month amid looming recession fears, but history shows that the market’s rapid pace of decline this year could actually be a positive sign—with stocks set to rebound if the broader economy avoids a downturn.
The S&P 500 officially fell into a bear market on June 13, closing down more than 20% from its record high in January; and although the benchmark index bounced back above that threshold last week, stocks have been falling and pushing markets lower once again.
“No two bear markets are exactly alike,” according to Bespoke Investment Group; that said, over half of bear markets since World War II have preceded a recession but those that did not lead to an economic downturn tended to last for a shorter time, on average.
“The good news is that the bull market took just 161 calendar days to go from its peak to a 20% decline threshold—compared to an average of 245 days in past bear markets,” says Sam Stovall, chief investment strategist for CFRA Research.
Based on historical S&P 500 returns since 1945, a “quick” descent into a bear market often tends to signal more “shallow” declines ahead rather than “mega-meltdowns”— declines of 40% or more, he adds.
There have been five past bear markets where the S&P 500 reached a 20% decline threshold in below-average time (1961, 1966, 1987, 1990 and 2020), and in all instances, the average market decline ended up being less than 27%, Stovall points out.
Overall, in all 14 bear markets since 1945, the S&P 500 fell by an average of 32% and took an average of 12 months to find a bottom, while fully recouping those losses within an average of 23 months, according to CFRA data.
The most recent (and shortest) bear market was in March 2020, when Covid pandemic lockdowns sent the U.S. economy into a brief recession. That downturn was far shorter than other bear markets in the past, however, lasting only one month compared to the bear market after the dot-com crash, which lasted 31 months. Stocks took just over a month to bottom out at a neary 34% decline during the 2020 bear market.
“Historically, the current bear market is light relative to many seen since 1946,” says Lindsey Bell, chief money & markets strategist for Ally. If the Fed is able to “push inflation lower,” that brings a greater likelihood of only a “mild” economic slowdown, making a “shallow bear market” a possibility, she notes, adding that once stocks do hit a bottom, returns over the next year are often quite strong.
What To Watch For:
“If a full-blown crisis and recession such as in 2000-2002 and 2008-09 can be avoided, this bear market may bottom soon,” predicts Ryan Detrick, chief market strategist for LPL Financial. With over half of the last five bear markets ending in three months or less, “the current bear market may be closer to a bottom than many expect,” he says, adding, “how this bear market will end will likely hinge on the pace at which inflation comes down, which will dictate the timing and magnitude of the Federal Reserve’s rate hiking campaign.”
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