How do bear markets recover?

Anytime the stock market is discussed, you’ll hear the terms “bull” and “bear” markets tossed around. One is good and one is…bad? Is that right? In the already mysterious world of investing, it seems a little silly to assign zoomorphic traits to market movements, but here we are.

A bull market is a market that is on the rise in a strong economy.

A bear market is a market that is on the decline in a poorly-functioning economy.

A bear market is defined by stocks, on average, falling at least 20% off their high. A most intuitive way to define the market is when something happens that causes investors to seek safer, less risky investments for a time period of two quarters or more. That “something” can be political, environmental, medical, or a natural disaster. The important distinction is that the entire market feels the shift, not just a few personal portfolios. In other words: Your bear market may not be a true bear market, you might have just hit a stretch of poor performance in an otherwise healthy market.

History of bear markets

Between 1926 and today, there have been nine bear markets. They’ve lasted anywhere from six months to about 2 ½ years. The stock market crash of 1929 lasted from October 10-29 and left the total value of the S&P 500 at just 15% of what it was on October 9th. In the years that followed, people panicked and sold off their investments. This, paired with a less-than-stellar reaction by the Federal Reserve, created a horrible economic situation that impacted an entire generation of Americans.

Most of us remember the bear market of 2007-2009 following the housing bubble. During those years the S&P 500 was reduced by half of its value. The U.S. slid into a recession in 2007, the housing bubble burst and mass layoffs occurred, which meant millions were suddenly unable to meet their financial obligations. This culminated in a financial crisis in September 2008.

The Federal Reserve pulled the country out of that crisis by the Federal Reserve, who gave billions to the mortgage industry, supplied Americans with a small advance on their taxable income, and pushed interest rates down to near zero—which it had never done before. All in all, this took several years to accomplish.

In March of 2020, the market fell by a record-breaking 3,000 points. The Dow Jones Industrial Average was down 31.7% from its all-time high and the S&P 500 and Nasdaq more than 29% below their records. In the following days (not years, like it took in the prior decade), the Fed dropped interest rates to near-zero, the Treasury poured trillions into the market (which quickly disappeared), and a $2 trillion stimulus package was prepared and passed by the House and the Senate. The following week, almost 10 million Americans signed up for unemployment and were told that their stimulus checks (which max out at $12,000 per adult) would be arriving by the beginning of summer. Though it doesn’t meet the time frame, events certainly signaled a bear market.

Bear market recovery

Past performance is not a guarantee of future results, and, as we’ve said before, timing the market is impossible. In 2002, the S&P 500 bottomed out at 777, following a 2 ½-year bear market. The stock index then gained 15% over the following month and a total of 34% over the following year.

The S&P 500 bottomed out at 683 on March 9, 2009, after a 60% decline. Following that trough, the market just about doubled its value in the following two years.

Selling in a bear market

Investors who are considering selling stocks during a bear market might want to rethink that since properly timing the beginning of a new bull market can be challenging—the experts say not to even try.

Warren Buffett’s approach to long-term buy and hold investing makes a lot of sense, after all this man really knows what he’s doing. As the old saying goes, “Investing is like a bar of soap; the more you handle it, the smaller it gets.” Markets rise far more often than they fall. Something else to consider: trying to correctly time a market decline means you need to be right twice to profit (when to get out and when to get back in).
Any strategy that relies on making market timing predictions for profit is the riskiest move possible.

Investing in a bear market

Investing in a bear market means staying the course. If your asset allocation is on point, you theoretically should be fine. When the market begins its upswing, which again, no one can predict, you can always do a rebalance if need be.

Before you invest at all, you should have your basics covered. You need to be able to cover your expenses and have an emergency fund in place. The appropriate amount you should set aside for your emergency fund is unique to your situation, but in general, $500 to $1,000 is a good start. The best place for an emergency fund is a high-yield cash account.

Once your emergency fund is in place, it’s wise to plan for a larger emergency. Experts recommend having three to six months of your basic expenses put aside in a fund meant for the rainiest of days.

Never cut contributions to retirement accounts or your investment budget during down markets. Investing the same amount of money into certain investments on a regular basis is called dollar-cost averaging and it’s a real game-changer. By investing a steady amount of money in any kind of market, good or bad, bull or bear, you may be able to grasp the best average returns over time and even out fluctuations.

It works like this: If you consistently invest $500 a month, you’ll automatically buy fewer shares at high prices and more shares when they’re at a discount. For example, if a stock or ETF’s price falls to $50 one week, you’ll buy ten shares; if it rises to $100 the next week, you’ll buy five shares.

When will the bear market end?

No one knows. Over time and on average, it takes years to recover from such a setback. Anywhere from one to seven, actually. If the market goes right back to where it was, performance-wise, prior to the drop, it would be three years before we hit a break-even point. But that’s based on average performance, which, again, is impossible to predict. Historically, we know that the market returns 10% to its investors, but that’s not a guaranteed every year return.

With great losses come difficult-to-swallow math. If you lose 5% of your portfolio, you only need a 5.3% gain to recover. A 40% loss required a 67% gain to break even. And if you lose 50%, you need a 100% bounce just to get back where you started.

The bottom line

It’s impossible to time the market, experts say don’t even try. Instead, view your time in the market as your most valuable weapon against losses. Investing in the stock market carries an inherent risk, that’s why we recommend having your personal finances and cash account set before you dive in—it’s a long-term strategy.

The above content is provided is paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.