Bear markets are part of normal market trends and are a sign of stocks going down in value for an extended period of time. Since 1928, the S&P 500 has experienced 26 bear markets.
Definition of a Bear Market
A bear market is one where the market declines 20% or more over at least a two-month period of time. Bear markets indicate a downward trend in the market and can be triggered by a market correction where the market drops between 10% to 20% in a short period of time. Bear markets can be part of a recession where the economy has high unemployment and negative GDP output.
Cyclical Nature Of Markets
Capital markets are cyclical in nature. For every bear market, a bull market follows. For the same 26 bear markets seen since 1928, there have been 27 bull markets.
Tip: Long-term investors may be frustrated with bear markets, but will generally see their portfolios grow again over time as the market shifts back to a bull market.
What Happens In a Bear Market
Investors don’t like bear markets because of what happens. The markets go down, which means that investment values go down. Those seeking to cash out for a profit may find that hard to do, especially if the investment was a short-term strategy. Investors can use financial tools such as the Leading Economic Index as a forward-looking indicator of economic variables. The yield curve is another forward-looking indicator that a bear market may be upon us.
Tip: When the yield curve inverts, credit tightens and business activity tends to go down.
Bear Markets In the U.S. Since 1928
There have been 28 bear markets since 1928. The average decline was 35.62%, and the average length of time was 289 days.
Dates Decline Percentage Length in Days 9/7/1929–11/13/1929 -44.67% 67 4/10/1930–12/16/1930 -44.29% 250 2/24/1931–6/2/1931 -32.86% 98 6/27/1931–10/5/1931 -43.10% 100 11/9/1931–6/1/1932 -61.81% 205 9/7/1932–2/27/1933 -40.60% 173 7/18/1933–10/21/1933 -29.75% 95 2/6/1934–3/14/1935 -31.81% 401 3/6/1937–3/31/1938 -54.50% 390 11/9/1938–4/8/1939 -26.18% 150 10/25/1939–6/10/1940 -31.95% 229 11/9/1940–4/28/1942 -34.47% 535 5/29/1946–5/17/1947 -28.78% 353 6/15/1948–6/13/1949 -20.57% 363 8/2/1956–10/22/1957 -21.63% 446 12/12/1961–6/26/1962 -27.97% 196 2/9/1966–10/7/1966 -22.18% 240 11/29/1968–5/26/1970 -36.06% 543 1/11/1973–10/3/1974 -48.20% 630 11/28/1980–8/12/1982 -27.11% 622 8/25/1987–12/4/1987 -33.51% 101 3/24/2000–9/21/2001 -36.77% 546 1/4/2002–10/9/2002 -33.75% 278 10/9/2007–11/20/2008 -51.93% 408 1/6/2009–3/9/2009 -27.62% 62 2/19/2020–3/23/2020 -33.92% 33
Historical Bear Markets That Lead To Recessions
Not every bear market leads to a recession. Take a closer look at the bear markets since 1928 that have led to a recession.
Bear 1: September 7, 1929—November 13, 1929
This is actually the start of several bear markets that were part of the Great Depression that lasted through March of 1933. Between these dates, the stock market lost 73% of its value. This decline paralleled a 12.9% economic contraction, with unemployment going as high as 24.7%.
Bear 2: June 1948—June 1949
This bear market lasted 363 days with a more than 20% drop in the market value. An 11-month recession began in November 1948 and lasted until October 1949. During this period, unemployment peaked at 7.9%. The cause of this recession was a rapid rise in interest rates by the Fed.
Bear 3: August 1956—October 1957
While the stock market saw 446 days of a bear market with a 21.63% drop in value, the GDP fell 4.1% in the last quarter of 1957 and 10% in the first quarter of 1958. The recession lasted until April of 1958 with unemployment reaching a high of 7.5% in July of 1958.
Bear 4: November 1968—May 1970
This bear market went on for the better of two years, with the market losing 36% of its value. The recession started in December of 969 and continued until November 1970. Unemployment peaked at 6.1%, with the GDP falling 1.9% in the fourth quarter of 1969 and 0.60% in the first quarter of 1970. This recession led to a brief recovery in 1971 when the GDP rose 11.3%.
Bear 5: January 1973—October 1974
This bear market lasted 630 days with a 48.2% decline in the market. The recession lasted 16 months, with much of the economic woes starting with the OPEC oil embargo. Inflation seeped into the economy, and unemployment rates peaked at 9%.
Bear 6: November 1980—August 1982
This bear market lasted 622 days, with the overall market dropping 27.11%. This is actually a bear market that had two recessions in it. The first was in the first two quarters of 1980 and the second lasted from July 1981 to November 1982. The Fed raised interest rates to fight skyrocketing inflation, leading to the recession. In this period, the unemployment rate climaxed at 10.8%.
Bear 7: March 2000—September 2001
The market went down more than 36%, and this bear market lasted 546 days. In this time, an eight-month recession hit the country. The primary factor leading to the recession and market decline was a bust in the dot-com industry. The recession culminated when the 9/11 attacks happened.
Bear 8: October 2007—November 2008
The market saw a sharp drop of nearly 52%, with a bear market lasting for 408 days. This period is known as the Great Recession and is when the housing market collapsed. The GDP contracted three quarters in a row as unemployment rates jumped to 10%. The recession lasted through the third quarter of 2009 when an economic stimulus package was approved.
Bear 9: February 2020—March 2020
This is a short bear market that lasted only 33 days but saw a drop in the market of nearly 34%. The COVID pandemic wreaked havoc on the economy, with an economic contraction of 31.4% in the second quarter. This was the second quarter it fell, dropping 5% in quarter one. Unemployment jumped to 14.7%.
Bottom Line
Investors need to understand that bear markets are part of the investment landscape and are part of a natural market cycle. Investors should be concerned with short-term investments during a bear market but can usually withstand the downward cycle for longer-term investments.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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