Bear Markets
Bear markets are common and will likely happen a handful of times during an investor’s lifetime. A bear market occurs when the price of an asset class falls at least 20%. There have been fourteen bear markets in the S&P 500 index since World War II, averaging a 32% peak-to-trough decline (table below). The S&P 500 index peak before the first one was 19.3. Today the index stands at 4,300. History has proven that the declines are temporary, and advances are permanent.
Fourteen Bear Markets Since the End of World War II (excludes the softening effect of dividends)
| Market Top | Market Bottom | S&P 500 Top |
S&P 500 Bottom |
% Decline | Duration |
|---|---|---|---|---|---|
| 5/29/1946 | 6/13/1949 | 19.3 | 13.6 | -30% | 37 Months |
| 8/2/1956 | 10/22/1957 | 49.7 | 39.0 | -22% | 15 |
| 12/12/1961 | 6/26/1962 | 72.6 | 52.3 | -28% | 7 |
| 2/9/1966 | 10/7/1966 | 91.4 | 73.2 | -22% | 8 |
| 11/29/1968 | 5/26/1970 | 108.4 | 69.3 | -36% | 18 |
| 1/11/1973 | 10/3/1974 | 120.2 | 62.3 | -48% | 21 |
| 9/21/1976 | 3/6/1978 | 107.8 | 86.9 | -19% | 18 |
| 11/28/1980 | 8/12/1982 | 140.5 | 102.4 | -27% | 21 |
| 8/25/1987 | 12/24/1987 | 336.8 | 223.9 | -34% | 4 |
| 7/16/1990 | 10/11/1990 | 369.0 | 295.5 | -20% | 3 |
| 7/17/1998 | 8/31/1998 | 1186.8 | 957.3 | -19% | 2 |
| 3/24/2000 | 10/9/2002 | 1527.5 | 776.7 | -49% | 31 |
| 10/9/2007 | 3/9/2009 | 1565.1 | 676.5 | -57% | 17 |
| 2/19/2020 | 3/23/2020 | 3386.2 | 2237.4 | -34% | 1 |
Despite the positive expected returns of stocks, they tend to be volatile in the short-term. This can make sticking with a long-term view and strategy difficult for many investors. This problem is referred to as “myopic loss aversion” (Richard Thaler and Shlomo Benartzi - 1993 research paper). Thaler and Benartizi theorized investors are generally loss averse. Myopic loss aversion occurs when investors take a view of their investments focusing on the short term, leading them to react too negatively to recent declines in the financial markets, which may be at the expense of long-term benefits. Myopic loss aversion is easier to live with if an investor knows how the story will end.
Of course, it's difficult to endure a bear market when every financial market pundit is crying Armageddon. When living through a bear market, it’s easy for investors to think things will never get better. Sometimes when the news is bleak, many investors fear what the late John Templeton called “among the four most dangerous words in investing are: this time it’s different.”
Fortunately, we do know how things have played out after previous bear markets. Enduring losses with the knowledge that things will get better soon is much easier than dealing with the uncertainty over a shorter time period. Historically, bear markets have been followed by recoveries rewarding the investors who stuck with their long-term strategy. History has shown that, for a properly diversified investor, holding on through periods of uncertainty has delivered a reliably positive outcome. Bear markets are inevitable, and investors must be willing to endure them in exchange for the opportunity to grow their wealth.
Famed investor Peter Lynch once said, “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”
We do not believe the economy can be forecasted with any consistency, nor the financial markets consistently timed. We believe the most reliable way to capture the long-term return of stocks is to ride out their temporary declines.