Six Things To Know About Bear Markets

Posted by Ryan Detrick, CMT, Chief Market Strategist

Wednesday, May 17, 2022

It has been a historically bad year so far for stocks, with many names in bear markets. Thus far though, the S&P 500 Index has avoided a bear market (classified as a 20% decline from recent highs), as it was down 18.1% as of last week.

Here are six things to know regarding bear markets.

1) There have been 17 bear (or near bear markets) since World War II. The average drop was nearly 30% and lasted nearly a full year.

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2)  Breaking down bear markets with recessions and without recessions shows an interesting development. Should the economy be in a recession, the bear markets get worse, down 34.8% on average and lasting nearly 15 months.

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3)  Whereas as shown in the LPL Chart of the Day, should the economy avoid a recession, the bear market bottoms at 23.8% and lasts just over seven months on average. Even more interesting is we’ve seen multiple near bear markets bottom near 19%, close to where stocks bottomed last week.

“Going back more than 50 years shows that only once was there a bear market without a recession that lost more than 20% and that was during the Crash of 1987,” explained LPL Financial Chief Market Strategist Ryan Detrick. “With other near bear markets without a recession bottoming near 19% corrections in 1978, 1998, 2011, and 2018, not far from the recent lows.”

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4)  Midterm years can be quite volatile with the average year down 17.1% peak to trough, so a bear market during this year isn’t out of the ordinary. Knowing that helps put this year’s drop of 18.1% in perspective. The good news is a year off those lows, the S&P 500 has gained 32.0% on average, something most investors would likely take right about now.

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5)  Here are the fastest bear markets ever. Not surprisingly, the pandemic related bear market of March 2020 was the fastest ever, going from a new high to down 20% in only 16 trading days.

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6) This is the third year of the current bull market and the third year tends to see somewhat muted returns, up barely 5% on average. In fact, there have been 11 bull markets since World War II and three of them ended during their third year.

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So those are six things to know about bear markets. Lastly, speaking of six, the S&P 500 is down six weeks in a row currently, the longest losing streak since 2011. It hasn’t been down seven in a row since 2001. What stands out about this data is if the six week losing streak is down more than 10% (like this one was), then the future returns can be quite strong. Up a median of 9.9% six months later and 29.2% a year later.

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For more on how close stocks are to a low, the strong first quarter earnings season, and why the 60/40 portfolio isn’t dead, please watch the latest LPL Market Signals podcast with Jeff Buchbinder and Ryan Detrick, as they break it all down.


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