- The S&P 500 briefly entered bear market territory on Friday for the first time since March 2020.
- A bear market is technically defined as a decline of at least 20% in the stock market from its peak.
- Here’s everything you need to know about this vicious part of the stock market cycle.
The S&P 500 briefly entered bear market territory on Friday for the first time since March 2020 as investors continue to assess record inflation, surging interest rates, and its impact on consumers and corporate profits.
The S&P 500 is now down more than 20% from its peak reached at the start of the year, catching up with the Nasdaq 100 which officially entered
territory earlier this month. The stock market’s sell-off was solidified this week following the poor earnings from big-box retailers like Target and Walmart.
Given the volatile regime the stock market has entered, it’s good to know how stocks might act during this period, based on previous bear market data compiled by LPL Research. Here’s everything you need to know about this vicious part of the stock market cycle.
1. The average decline during a bear market is 30%, and the downturn lasts an average of 11.4 months, or almost a full year. That’s based on the 17 bear markets since World War II, according to LPL Chief Market Strategist Ryan Detrick.
2. There are bad bear markets, and then there are less bad bear markets. What distinguishes the two is whether or not the economy enters a
“Should the economy avoid a recession, the bear market bottoms at 23.8% and lasts just over seven months on average,” Detrick said. But bear markets get worse during recessions, with an average decline of 34.8%, and lasting for an average of nearly 15 months.
“Going back more than 50 years shows that only once was there a bear market without a recession that lost more than 20% and that was during the crash of 1987,” he said.
Detrick told CNBC on Friday that he ultimately doesn’t see a recession materializing this year, and rather sees a mid-cycle growth slowdown akin to 1994 before the stock market resumes its long-term uptrend.
3. “Midterm [election] years can be quite volatile with the average year down 17.1% peak to trough, so a bear market during this year isn’t out of the ordinary,” LPL said. And returns tend to get strong a year off those lows, with an average gain of 32%. Additionally, the first and second quarter of a midterm election year represent the two worst quarters for stock market performance of the entire four-year presidential cycle.
4. There have been fast bear markets. The March 2020 pandemic-induced bear market was the fastest on record, as it went from a new high to down 20% in just 16 trading days.
5. “This is the third year of the current bull market and the third year tends to see muted returns, up barely 5% on average. There have been 11 bull markets since World War II and three of them ended during their third year,” Detrick said.