What a bear market is and how long they usually last
By March 2020, the bull market that ran for roughly 11 years appeared to have ended. The rapid spread of the coronavirus outside China set off a severe financial and social shock. In the panic that followed, the S&P 500 fell almost 22% for the year to date. As a result, it stood about 25% below its February 19 high at the time of writing. In other words, the index entered what investors commonly call a bear market. This article explains what a bear market is and how long they usually last, using historical ranges rather than predictions.
What a bear market is and how long they usually last
The common test is simple. An asset typically enters a bear market after a cumulative decline of at least 20% from its peak. Of course, the 20% line can seem arbitrary. However, it screens out the many short-lived dips the market passes through. In contrast, analysts call a decline of more than 10% but less than 20% a correction.
Some specialists sort bear markets into three types: structural, cyclical and event driven. In our view, the recent decline most resembles an event-driven bear market. That judgment could change, however, as events unfold.
Lessons from past cycles
First, statistics that predate the coronavirus put the average bull market at roughly 9.9 years. The latest run lasted about 11 years. In that cycle, the market peaked in October 2007 and bottomed in February 2009. However, a full recovery did not arrive until March 2012.
Next, historical figures suggest downturns have typically lasted 11 to 14 months before the trend changed. Over those periods, the typical decline from the peak has been roughly 30% to 35%. In addition, rebounds after the floor have historically run 6 to 12 months, with returns of roughly 26% to 30%. Most importantly, these are historical averages, and individual bear markets have varied widely. Past performance does not guarantee future results.
How to read these historical ranges
Averages can hide a lot of variation. For instance, a single long downturn can pull the average duration up, while several brief ones can pull it down. Therefore, investors should treat these figures as a rough frame of reference rather than a schedule. In practice, no one can know in advance whether a given decline will prove short or long. Instead, the ranges simply show what has happened before.
Where things stand now
For the moment, the timing of a floor remains uncertain. There is no news of meaningful progress toward a vaccine. Meanwhile, the outbreak is still at an early stage in terms of potential new cases. Governments in the United States and Europe are also adopting increasingly strict measures to counter it.
Fortunately, governments worldwide have supported their economies through monetary and fiscal stimulus. For example, many programs target the small and medium sized businesses that tend to suffer most. This support is unlikely to fully eliminate the economic impact. In practice, it may help limit the damage and could allow a faster recovery, although no one can promise that outcome.
How investors can respond
Understanding what a bear market is and how long they usually last can help investors keep recent moves in perspective. In our view, periods like this call for a diversified portfolio and a disciplined strategy. Above all, a longer time horizon can make short-term swings easier to weather. Of course, diversification does not ensure a profit or protect against loss.
Before making changes, investors can review their goals, time horizon and tolerance for risk. For example, someone who needs cash within a year faces different choices than someone saving for retirement decades away. As a result, the right response depends on personal circumstances. Finally, a financial professional can help an investor weigh these factors against the current market.
This article is for educational purposes only and is not individual investment advice.
