Markets Are Looking Bearish Again. Now What?

Find out what you can expect during a bear market, and how to weather a market downturn.

The onslaught of negative headline news has continued over the past month – COVID-19 lockdowns in China have caused its GDP growth to slow significantly, and inflation has moved even higher in the US and Europe.

In an attempt to cool inflation, the US Federal Reserve raised its benchmark rate by 75 basis points in June – its biggest hike since 1994. Markets have slumped on fears that this cycle of aggressive rate hikes could potentially tip the US economy into recession.

So what can you expect during a bear market? Let’s dig deeper.

Key takeaways:

• A bear market is typically defined as a period when a stock market drops 20% or more from its recent high. Bear markets happen every 3.6 years or so, but they don’t always coincide with recessions.
• It can be uncomfortable to see your investments decline in a bear market, but remember that markets have always bounced back.
• Building a diversified portfolio and ensuring your asset allocation matches your risk tolerance are two things you can do to weather a market downturn.

Here’s what you should know about bear markets

A bear market is commonly used to describe a prolonged period of market declines and investor pessimism. We typically say we’re in a bear market when a stock market falls by 20% or more from its recent high.

Looking at past bear markets in the S&P 500 Index over the past 100 years:

• We can see that they’re relatively common – the average length of time between bear markets is 3.6 years.
• There have been 26 bear markets in the S&P 500 Index since 1928. Despite this, stocks have risen significantly over the long term.
• Bear markets are shorter-lived than bull markets: The average length of a bear market is about 9.6 months, while bull markets last for an average of 32 months.

Periods of stock market declines have been, and will continue to be, normal parts of an investor’s journey. But it’s important to note that bear markets don’t always coincide with recessions. In 11 past instances of S&P 500 bear markets, 4 (or over a third of them) didn’t end up leading to a recession.

Source: CNBC, LPL Research, Factset.

In fact, our models inform us that we’re currently still in the inflationary growth stage of the economic cycle, at least in the US.

How to weather a market downturn 

It can be uncomfortable to see your investments decline in a bear market, but remember that markets have always bounced back. If you listened to all the negative headline news in the media, you might have stayed out of the market for most of the last 30 years, jeopardising your long-term financial goals.

While it could be tempting to try to time the market and wait for the bottom before you invest, this strategy has been proven to be ineffective. Research shows that markets see their strongest gains soon after their biggest drops – in fact:

• Half of the S&P 500’s best days in the last 20 years occurred during a bear market.
• Another 34% of the market’s strongest days happened in the first 2 months of a bull market – before it was even clear that a bull market had begun¹.

So the best way to weather a bear market is to stay invested and continue dollar-cost averaging, since it’s almost impossible to time the market’s recovery.

Building a diversified portfolio and ensuring your asset allocation matches your risk tolerance are two things you can do to keep a cool head in bull and bear markets – and at all stages of an economic cycle.

¹ Source: Ned Davis Research, 12/21. Time period referenced is 12/16/01–12/15/21.