Improving Investor Behavior: How long will a bear market last?

The S&P 500 is down about 17% as of Wednesday, May 25, narrowly avoiding the traditional definition of a bear market at negative 20%. The NASDAQ has already fallen well into bear market territory with a loss of about 28% year to date. The DOW is down a hair over 12%. The U.S. could be on the edge of a recession, technically defined as two consecutive quarters of negative GDP growth. The U.S. printed a decline last quarter, proving we’re already halfway toward a recession, despite promises to the contrary made by Federal Reserve Chairman Jerome Powell.

Any way you look at it, things are ugly.

It’s easy to point fingers and lay blame: war in Ukraine, inflation, questionable Federal Reserve policies, White House policies, and supply issues, all of which are contributing to higher prices on everything from gas and food to homes. Americans are beginning to feel the pinch.

There are two truths we must remember. The first is that, yes, a bear market and recession are very possible at this point. No one ever knows long it will last or how painful it may be for investors. Second, the bear market will end at some point, and the negativity will reverse. It may present opportunities to acquire great businesses at attractive prices until it does.

But when?

That’s the question on everyone’s mind, but the reality is there is no way of knowing. Think back to the last bear market in early 2020. With COVID peaking and the world seemingly shut down, the S&P 500 fell almost 34%. However, given the drop’s traumatic circumstances, the downturn was short-lived. The bear market ended just over one month later.

If we assume 2020 was an unusual bear market (considering it was the shortest of all time, lasting just over one month), we can look to the averages for more perspective. Since World War II, there have been 17 bear (or near bear) markets with an average drop of 30% and an average recovery time of about one year. Focusing on just those accompanied by a recession increases both the drop and recovery time to 34.8% and 15 months, respectively.

Remember, this also happens to be an election year, and they tend to have more volatility than most, with an average peak to trough of about 17.1%. The good news is that a year later, the markets averaged a positive 32% return.

Now we know past performance is not indicative of future results, but the data seems to suggest that we’re near an average bottom. How much further markets will go and for how long remains to be seen. We can hope for a short-lived bear market akin to those in 2020 (1.1 months) or 2018 (3.1 months). Hopefully, it will be faster than the worst since WWII, which was 2000 (30.5 months) or 1974 (20.4 months).

Bottom line: Nobody knows.

The key is, as always, to be prepared. Have a great financial plan that includes:

• Being debt-free so you will have excess cash flow that you can reinvest when prices are low, such as times like these.
• Having ample cash reserves for emergencies, projects, and planned expenditures. Emergencies happen, so plan for them with cash set aside.
• Investing for cash flow rather than price. A focus on dividend-paying companies can provide both modest price growth and, more importantly, rising income through growing dividend payments. Your cash flow must increase at a rate that outpaces inflation, especially if you plan to rely on it for 30 to 40 years during retirement.
• Not investing purely for price fluctuation. You have to be “right” three consecutive times: buy low, sell high, and buy low again. Ask any long-term investor, and you hear that it is hard to do with any consistency.