Bear markets are typical of any market. The most recent in global equities was the result of the health crisis due to the Covid-19 pandemic, which, economically, led to forced closures for companies and, in the financial framework, volatility was unleashed in the markets.
But what are bear markets like? Is the last one far from the historical average? Given that US equities represent 60% of global equities and that they are highly correlated with the rest of the stock market environments, we will focus on this mainly.
What are bear markets like?
First of all, we must define what a bear market is. This is a prolonged market period in which an investment has falling prices. Typically characterized by a stock market that has fallen at least 20% from its previous high.
Historically, bear markets have been repeated over the years, as investor expectations are discounted through prices. We look at its structure and its main characteristics.
Taking as a reference the US equities represented by the S&P500, bear market losses are 35.62% -bull markets add an average revaluation of 114%-. Comparatively, the last bear market that the S&P500 experienced, the index fell 33.92% so we were very close to the historical average
They are more frequent than many may believe as a result of the mirage of recent years. We have seen 26 bear markets since 1928.
It should also be noted that the bear market does not always go hand in hand with an economic recession. The most obvious proof is that I have those 26 bear markets since 1929, but only 15 recessions during that time. Bear markets often go hand in hand with a slowing economy, but a declining market doesn’t necessarily mean a recession is coming.
It is said that when the market goes up it goes up the stairs and when it goes down it goes down the elevator, and the statistics back it up. Bear markets tend to be short-lived. The average length of a bear market is 289 days, or about 9.6 months. That’s significantly shorter than the average duration of a bull market, which is 991 days or 2.7 years.
The last bear market was exceptionally short, 33 days to sign lows, the shortest in the last century.
On average **every 3.6 years we would see a bear market*. For its part, while the bull market that ended in 2022 is considered by many to be the longest on record, the one that lasted from December 1987 to the dot.com crash of March 2000 is technically the longest – a 19.9% drop in 1990 almost makes it jump-.
Despite multiple bear markets, they have been less frequent since World War II. Between 1928 and 1945 there were 12 bear markets, that is, one every 1.4 years or so. Since 1945, there have been 14, one every 5.4 years or so.
The Four Worst Bear Markets
Bear markets can be very intense, the following four bear markets have been the worst in the last century:
- The crash of 1929 that opened the doors to the Great
- The oil crisis of 1973, which was followed by a period of stagflation.
- After the biggest bull market in history, the dot.com crisis.
- The subprime mortgage crisis that has marked the era of low interest rates.
From them, the bear market from September 1929 to June 1932 resulted in an 86.2% loss for the S&P. The others aren’t even close, with losses of 56.8% in 2007-09, 49.1% in 2000-02, and 48.2% in 1973-74. After the crash of 1929-32, stocks did not recover their previous high until 1954.
As an interesting tidbit, three of the four worst bear markets were preceded by a high valuation. Among the four worst bear markets with more than 40% losses, they started with a somewhat extreme market valuation. The one exception is the 1973 bear market caused by the Arab oil embargo and subsequent recession, but it also had an above-average P/E early on.