How long will the bear market last? This is what history shows | Smart Switch: Personal Finance

(Keith Speights)

If you’ve ever been on a road trip with kids, you’ve probably heard the inevitable question: Are we there yet? Even adults like to know how far they are from their destination.

This same sentiment is true with the current stock market pullback. Most investors know that stocks will recover sooner or later. And they would love to know how far into the future the rebound will occur.

How long will this bear market last? Unfortunately, there is no clear answer. However, we can gain some perspective by looking at historical market downturns.

Image source: Getty Images.

Market crashes of the past

Significant declines are not unusual for the S&P 500. They occur regularly at different levels of intensity.

The worst type of market crash is a bear market, which is defined as a period in which the market falls 20% or more from the most recent high. Stock market corrections are more common. They occur when stocks sink by at least 10% (but less than 20%).

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Bear markets tend to last longer than corrections. The longest bear market for the S&P 500 occurred during the Great Depression and lasted 2.8 years. Since the 1950s, the longest bear market was in the early 2000s, when the dot-com bubble burst. It has a duration of 2.1 years.

The S&P 500 entered bear market territory on Friday, but just barely (no pun intended). I could quickly go back to a correction. Most corrections do not result in full-blown bear markets. The ones that don’t last sometimes only a few weeks. Others may continue for months. However, fixes rarely last more than a year.

closest cousin

No market correction is exactly the same. However, they are sometimes similar in various aspects.

The current sell-off in the S&P 500 appears to be due primarily to two related factors. Inflation is skyrocketing, fueled by coronavirus-related supply chain problems and high fuel prices resulting in part from the Russian invasion of Ukraine. Interest rates are also rising as the Federal Reserve tries to keep inflation in check.

These are not the same underlying issues that were present during the long bear market in the early 2000s. Probably the most significant common denominator between the current sell-off and the sharp drop back then is that they both followed bull markets for a long time. weather.

Arguably the closest cousin to the current S&P 500 crash is the bear market that began in late 1980. It lasted 622 days and ended in August 1982. Led by Paul Volcker, the Federal Reserve raised interest rates relentlessly to fight skyrocketing inflation. The current Federal Reserve Chairman, Jerome Powell, recently pledged, in the style of Volcker, to continue raising interest rates until inflation levels subside.

history lessons

The S&P 500 may enter a bear market that extends through the end of 2023 based on what has happened in the past. However, some economists believe that inflation will moderate to the downside this year.

If so, the Fed is not likely to raise interest rates anywhere near the levels seen during the bear market of the early 1980s. That could mean this bear market could be relatively short and will end later this year. .

Regardless of how long the current stock market selloff lasts, there are clear lessons investors can learn from history. More importantly, even deep recessions are only temporary. It is generally not advisable to sell all of your shares because you could miss out on the inevitable rally.

Actually, the smartest strategy for market downturns based on what’s happened in the past is to buy strong stocks and index funds as they fall. Doing so should set you up for even higher long-term returns.

Perhaps the best answer to the question of when the stock market selloff will end is the same one you’ve probably told your kids on road trips: “We’re not there yet, but we’re getting there.”

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