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Monday, July 14, 2008

Average Durations of Previous Bear Markets

I originally wrote this article in July 2008. At the time, S&P 500 had just gone into bear market territory from its highs just 9 months prior.  On July 7, 2008 S&P 500 went into bear market territory after sliding 20% from its October 9th 2007 all-time highs at 1565.15. The bear market correction had been going on for more than nine months. Little did I know that this would go on for 8 additional months. I updated the charts, and wanted to add some comments reflecting today's action.

A bear market is defined by a 20% decline from a previous all-time-high. This means that a 19% decline, like the ones we had in 2011 and 2018 do not qualify for a bear market. This is all very subjective of a definition, but at least it is consistent.

This week, the S&P 500 entered a bear market, ending the 11 year bull run off the lows in 2009. The highs were set in February 2020. We are already in a bear market, after 1 month, which is one of the fastest bear markets from a new high in history. Perhaps the recovery would be just as quick? Or perhaps it would take a long time to rebuild the economy and the supply shocks from the Covid-19 (coronavirus). Some economists argue we are already in a recession. Of course, economists have also predicted nine out of the last five recessions too.

So how long do bear markets last on average?

From the table below one could see that the average duration of bear markets has been about 18 months since the great depression. Since 1956 however the average duration of bear markets has been about fourteen months. The average decline since 1929 has been 39.3% versus 34.10% since 1956.




It has taken S&P 500 about 5 years on average to recover from to above its bear market highs since 1929. If we check the same parameter starting in 1956 the average recovery time from a bear market comes out to 2.8 years on average.

Note that this table only takes into consideration stock prices not adjusted for dividends. In other words, it doesn't show total returns. If it did, the time to recovery would shrink, and the severity of the recovery would shrink too.

For example, it took stock prices about 25 years to exceed their 1929 highs, when measured by S&P 500. If you account for reinvested dividends however, the investor broke even by 1936, which is just 7 short years after the worst economic depression for the US of the 20th century. 

The recovery to breakeven was short-lived however, as the US entered into another recession and bear market, and then the country entered World War II after Pearl Harbor. Adjusted for dividends (including total returns in other words), US stocks exceeded their 1929 highs and the 1936 highs again by 1944, and never looked back.

At the time of writing this article in 2008, I wrote the following: "If history could be of any guidance, S&P 500 could continues falling for five to nine more months by fourteen to twenty-two percent from current levels. This means that S&P 500 could fall to as low as 967 to 1068 until the end of 2008. Past performance seldom guarantees future results however. One thing will stay true though – investors who are greedy when others are fearful will reap huge benefits over the next few years as they scoop up good quality dividend companies at bargain prices."

When I updated the article in 2020, I wrote the following: "Since we reached our highs in February 2020, it may seem that the bear market could easily continue for 17 more months, just to keep up with the average. The stock market could also easily fall further from here. A 31% average decline from the highs of 3393 points reached just a month ago would take S&P 500 to 2070 points by the time this is over."

Ultimately, S&P 500 fell by 34.50% between February 2020 and March 2020. In point terms, S&P 500 dropped from 3,393.52 to 2,191.86. It then rebounded sharply and made an all-time-high by August 2020. This was a short but violent bear market, which lasted about six months.

S&P 500's all time high was reached at 4818.62 on the first trading day of 2022. Once we close below 3854, we would be in a bear market. That's a good time to be acquiring good companies at good prices. 

The conclusion is the same as in 2008. Investors in the accumulation phase should stay the course, and stick to their investment plan. They should be taking advantage of the sale, and buying future retirement income when it is on sale.

Investors in the retirement phase should continue living off their dividend income, and ignoring the noise.

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