How long will the bear market last? History offers two well-defined clues

Although you probably don’t need to be reminded, 2022 has been a miserable year for Wall Street and investors. Last year, iconic Dow Jones Industrial Average (^ DJI 0.33%)standard Standard & Poor’s 500 (^ GSPC 0.40%)and depend on the stock growth NASDAQ Composite (^ IXIC 0.71%) They decreased by 9%, 19% and 33%, respectively. More importantly, all three indices fell strongly to A Alcohol market.

While bear market dips are a normal part of the investment cycle, they nonetheless leave most investors wondering when the light at the end of the tunnel will be reached. Although there is no exact science to predict when a bear market will end, history provides two very clear clues about how long bear markets last.

A person draws an arrow and circles a sharp drop in a stock chart.

Image source: Getty Images.

It takes the average bear market over a year to hit rock bottom

Since the beginning of the 1950’s, the S&P 500 index has been widely followed It carries 39 discrete two-digit relative corrections. In all, 11 of these 39 declines have officially become bear markets. I say “official” because I didn’t include the peak drop of 19.9% ​​in 1990 or the 19.8% drop in the S&P 500 during the fourth quarter of 2018. None of these corrections reached the 20% line in the sand to be called a bear market.

Excluding the current bear market, here’s the number of calendar days it took for the previous 10 bear markets to reach their bottom, along with the size of each drop:

  • 1957: 99 calendar days, down 21%
  • 1962: 174 calendar days, down 26%
  • 1966: 240 days, 22% decline
  • 1968-1970: 543 days, 36% decline
  • 1973-1974: 630 days, down 48%
  • 1980-1982: 622 days, down 27%
  • 1987: 101 calendar days, 34% decline
  • 2000-2002: 929 calendar days, down 49%
  • 2007-2009: 517 days, down 57%
  • 2020: 33 calendar days, 34% decline

The first thing to note, courtesy of data provided by sell-side advisory firm Yardeni Research, is that the length of a bear market has no effect on the size of the decline. Just because the current bear market has continued for a period of time does not necessarily mean that the peak of the decline will be greater than other corrections.

The other key data point here is that we have spent 3,888 total calendar days in a bear market since the beginning of 1950. This means that the average bear market has lasted about 389 days (just shy of 13 months) over more than seven decades. If this average continues to rise, the current bear market will find its bottom over the next few weeks.

The Fed’s monetary policy suggests that the bottom of the bear market is out of reach

However, there is Another historical set of data points that bode ill For the S&P 500, Dow Jones or Nasdaq Composite.

Looking back several decades, US economic weakness and stock market corrections were met with relatively quick action by the Federal Reserve. The country’s central bank has a history of becoming monetary dovish during big dips in the broader market. In easy to understand terms, the Federal Reserve lowers interest rates to encourage lending when the US economy and/or stock market begins to show cracks in their respective foundations.

Effective fed funds rate chart

effective federal funding rate data by YCharts.

Since the beginning of this century, the Federal Reserve has conducted three cycles of easing interest rates.

  • January 3, 2001: In less than a year, the country’s central bank has devalued it Federal funds rate from 6.5% to 1.75%. It took the S&P 500 645 calendar days down after this first rate cut.
  • September 18, 2007: During the financial crisis, the Federal Reserve quickly cut the federal funds rate from 5.25% to between 0% and 0.25%. The S&P 500 will drop in March 2009 after 538 calendar days.
  • July 31, 2019: The last easing cycle this century saw the Federal Reserve cut the federal funds rate from between 2% and 2.25% to 0% and 0.25%. The S&P 500 bottomed out in March 2020 (during the COVID-19 crash) after 236 calendar days.

On average, it took 473 calendar days for the S&P 500 to bottom out once the country’s central bank started easing. If the current bear market follows previous cycles, a bottom is expected within the next four months.

However, we are not in a normal bear market or economic cycle. With inflation hitting a four-decade high in June 2022, the Fed had no choice but to aggressively raise interest rates to tame surging prices. Based on expectations from the Federal Reserve Board of Governors, Higher prices are not even in the cards Until sometime in 2024.

If it takes an average of 473 calendar days for the S&P 500 to bottom out once the easing cycle begins, we could consider The longest bear market in history and a counterpart that takes place sometime in the year 2025.

A person reading the financial section of a newspaper at home.

Image source: Getty Images.

Investing your money in a bear market is a smart move

Whatever data set ultimately proves to be the most accurate, it probably is The most important data point Most important of all is the success rate that investors enjoy when purchasing quality businesses and holding them over long periods.

Each year, market analytics firm Crestmont Research releases a report that examines the 20-year total tiered returns, including dividends, for the S&P 500 since the beginning of 1900. In other words, if an investor were to, hypothetically, buy the S&P 500 Tracking Index And holding that stake for 20 years, what is the average annual return for that stake?

Crestmont data shows that All 103 outgoing years he examined (1919 through 2021) produced a positive total return. Furthermore, a few finish years resulted in an average annual gross return of 5% or less, while more than 40% of all finish years produced an average annual gross return of between 10.9% and 17.1%. In short, there’s never been a bad time to put your money to work on Wall Street, as long as you have a long-term mindset.

If you’re looking for something more specific than “buy quality stocks,” consider dividend stocks and sectors and industries of basic necessities As smart places to put your money into a bear market.

Companies that pay regular dividends are always profitable and time-tested. In many cases, these companies have navigated their way through tough economic times and generally understood how to maintain profitability during these short-lived contractions.

To add, its dividends Historically, companies that don’t report a dividend have outperformed. According to a 2013 report by JP Morgan Asset Management, a division of the banking giant c. B. Morgan ChaseCompanies that started and increased their payments between 1972 and 2012 have averaged an annual return of 9.5% over four decades. By comparison, unpaid shares posted a meager annual gain of just 1.6% over the same period.

For the basic necessities sectors, consider utilities, basic consumer goods, and healthcare stock As interesting investments to weather the storm. For example, no matter how long the bear market lasts, people will not stop getting sick or ordering prescription drugs, medical devices, and healthcare services. This could cause well-established healthcare stocks to buy genius during a bear market.

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