Bear market basics

Looking at history can help you become "bear aware."

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Key takeaways

  • A bear market is commonly defined as a decline of at least 20% from the market's high point to its low.
  • Bear markets are a normal part of stock investing.
  • Bear markets have historically varied in length but stock markets have always recovered from them.
  • The current market downturn may be a bear correction within a long running secular bull market.
  • The end of the current market downturn will likely be affected by the health, monetary, and fiscal policy responses to the COVID-19 pandemic.

The S&P 500 entered a bear market on March 12, as worries about the impact of the COVID-19 pandemic, government-ordered shutdowns of businesses, and an oil price war prompted investors to sell stocks and bonds and seek shelter in cash. A bear market is commonly defined as a decline of at least 20% from the market's high point to its low during a selloff and the drop from a record high on February 19 to bear country less than a month later was the fastest and steepest decline on record. That rapid drop, though, doesn’t change the fact that bear markets are a normal part of stock investing and have historically appeared every 6 years on average.

But bear markets—like bull markets—can be either cyclical or secular and it’s unclear which species of bear has arrived this time. Cyclical bear markets arise when investor sentiment turns negative and typically last weeks or months. Secular markets are those driven by long-term trends such as the direction of interest rates or corporate earnings, rather than by the phases of the business cycle, and they may continue for many years despite even severe short-term interruptions. Secular bulls are characterized by prices rising over the long term despite occasional corrections and short-lived bear markets. Secular bear markets are the opposite—long term price declines punctuated by occasional market rallies.

Jurrien Timmer, director of global macro in Fidelity's Global Asset Allocation Division, says the current bearish decline does not necessarily represent the end of what may be a long-running secular bull market that began in March 2009. During that time, stocks fell into cyclical bear market territory 3 times. He also points out that the secular bull market which ran from 1982 to 2000 was interrupted by a market downturn in 1987 which took the S&P 500 33% lower. "I remember clearly that many people were bracing for a depression, which of course never happened," he says. "A year or two later the market was making new highs, and this continued for another decade or so until the peak in 2000."

Corrections versus bears

In short-term corrections where stocks drop by as much as 10%, buyers tend to quickly appear to take advantage of lower prices because they expect stocks to rise again soon. But, bear markets are characterized by a shift in investors’ expectations from confidence that the economy will grow and stocks will rise to skepticism about growth and doubts about the direction in which markets may move.

Uncertainty about whether stock prices will rise or fall can make investors more likely to sell stocks than buy. That sentiment may cause prices to continue to decline and lead to a prolonged period of low returns on the stock allocations in investors’ portfolios. Bear markets also pose risks for those who unwisely attempt to "time the market" by selling stocks when prices are falling or buying them at what they often wrongly believe is a market bottom.

What history tells us about bears

While bear markets are historically shorter-lived than bull markets, both are regular parts of investing. The S&P 500 has endured 16 bear markets since 1926. History shows that bears appear with steep drops in stock prices, but their behavior after their arrival varies in terms of how long they stay. Some bear markets have lasted for years, others a few months. Most have been accompanied by economic recessions, but not all.

A history of bear markets, ranked by size of market pullback

High Low Amount of decline Length of bear market (months) Recession during bear? 1-year return after low
9/3/1929 7/8/1932 −86% 34 Yes 124%
3/10/1937 4/28/1942 −60% 61 Yes 59%
10/9/2007 3/9/2009 −59% 17 Yes 68%
3/24/2000 10/9/2002 −49% 31 Yes 34%
1/11/1973 10/3/1974 −48% 21 Yes 38%
11/29/1968 5/26/1970 −36% 18 Yes 44%
8/25/1987 12/4/1987 −34% 4 No 23%
5/29/1946 6/13/1949 −30% 37 Yes 42%
12/11/1961 6/26/1962 −28% 6 No 33%
11/28/1980 8/12/1982 −27% 21 Yes 58%
2/9/1966 10/7/1966 −22% 8 No 33%
8/2/1956 10/22/1957 −22% 14 Yes 31%
7/16/1990 10/11/1990 −20% 3 Yes 29%
09/20/2018 12/24/2018 −20% 3 No 37%
 Average   −39% 22   47%
Source: ISI, Bloomberg, National Bureau of Economic Research, Haver Analytics, FMRCo (Asset Allocation Research Team) as of February 26, 2020. Data based on S&P 500 Index price returns. Duration ends with a complete retracement of losses. Recessions are defined by the National Bureau of Economic Research. Past performance is no guarantee of future results. You cannot invest directly in an index. The S&P 500®, a market capitalization-weighted index of common stocks, is a registered service mark of the McGraw-Hill Companies, Inc. and has been licensed for use by Fidelity Distributors Corporation.

The good news is that while bear markets have varied widely in severity and length, stocks have come back from each downturn and often have made sizable gains in the following months. The past is no guarantee of future results, but historically even the worst markets have been temporary dips in a general march upward for stocks.

What might chase the bear away?

This bear market has resulted from a global health crisis, rather than from the more typical ebb and flow of the business cycle, and the speed and time at which the bear departs will likely depend on how effective policies are in slowing transmission of the coronavirus and restarting economic activity.

Already, the fiscal and monetary policy response by the federal government has been both fast and vast and more stimulus spending and intervention in financial markets is being considered in Washington.

In the past, interest rate cuts by the Federal Reserve have helped lift stocks out of bear markets and infusions of liquidity into markets by the Fed’s asset purchase programs have muted volatility. So far, the central bank has responded to market volatility by cutting the federal funds rate to a range of between 0% and 0.25%, and restarting the program of buying bonds that it launched during the financial crisis and ended in 2014. The Fed has also not ruled out the possibility that it could buy shares of stock as central banks in other countries do. "Fortunately, the Fed is throwing everything it has at the problem, and doing so much faster than it did in 2008," says Timmer. "Back then, it still had to come up with the programs that it now can rapidly re-deploy."

However, the behavior of the coronavirus and prospects for increased testing, a vaccine, or other treatments are still uncertain. This unique aspect of the current market environment makes predicting the duration or severity of this correction uniquely challenging.

What should you do about the bear?

While it is impossible to know which direction the market will move in the near term, talking to your advisor can help ensure that your current asset allocation is appropriate to meet your long-term objectives regardless of the present market environment. While the decline in stock prices may require you to rebalance your portfolio, if you have a well-diversified mix of assets such as stocks, bonds, and cash that is consistent with your investment time frame, financial situation, and risk tolerance, bear markets should not be a reason for you to deviate from your financial plan.

Like a hiker passing through the Rockies, becoming "bear aware" can help increase your peace of mind despite the risks that may exist.

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