The Bear Market Field Manual

Markets fall on a schedule nobody publishes. This is the firm's standing guidance for when they do — what bear markets actually are, and how disciplined money behaves inside one.

9 Things to know about Bear Markets

2018 was a record setting year for investors of all kinds. Like all things great, a reset of expectations is needed from time to time. Here’s what you need to know about the dreaded bear market with a brief look at history.  

 20%: Market cycles are measured from peak (High) to trough (Low), so a stock index officially reaches bear market territory when the closing price drops at least 20% from its most recent high. A new bull market begins when the closing price gains 20% from its low.

36%: That’s how much stocks lose, on average in a bear market.1During a bull market, stocks gain more than 108% on average.

Bear markets are common. There have been 25 bear markets in the S&P 500 Index2in the last 90 years. However, there have also been 26 bull markets—and stocks have risen over time.

6 years: That’s the long-term average frequency between bear markets. The longest the market has gone without a bear market was from December 1987 until the dot-com crash in March 2000.

(Side Note) Bear markets have been less frequent since World War II. Between 1928 and 1945 there were 12 bear markets, or one about every 1.4 years. In the 73 years since the war ended, there have been 13—one about every 5.6 years.

299 Days: Bear markets tend to be short-lived. The average length of a bear market is about 10 months. That’s significantly shorter than the average length of a bull market, which is 989 days or 2.7 years.

Bear ≠ Recession: A bear market doesn’t translate into an economic recession. There have been 25 bear markets since 1929, but only 14 recessions during that time.4 Bear markets often go hand in hand with a slowing economy, but a declining market doesn’t necessarily mean a recession is looming.

14 Times: Assuming a 50-year investment horizon, you can expect to experience about 14 bear markets. It can be difficult to watch your portfolio dip during these periods, it’s important to keep in mind that downturns are a temporary part of the investing process.

77%: Bear markets can be painful, but overall, markets are positive a majority of the time. Over the last 90 years of market history, bear markets have made up about 20 of those years. Put another way, stocks have been on the rise 77% of the time.

Tough Timing: Nearly half (48%) of the S&P 500 Index’s strongest days occurred during a bear market. Another 28% of the market’s best days took place in the first two months of a bull market—before it was clear a bull market had begun.3 A better way to weather a downturn could be to stay invested, or well diversified, since it’s difficult to time the market’s recovery. 

When Bear markets Call
S&P 500 Index declines of 20% or more, 2/20/1928 – 12/31/2018

Start and End Date	% Price Decline	Length in Days
9/7/1929 - 11/13/1929	-44.67	67
4/10/1930 - 12/16/1930	-44.29	250
2/24/1931 - 6/2/1931	-32.86	98
6/27/1931 - 10/5/1931	-43.1	100
11/9/1931 - 6/1/1932	-61.81	205
9/7/1932 - 2/27/1933	-40.6	173
7/18/1933 - 10/21/1933	-29.75	95
2/6/1934 - 3/14/1935	-31.81	401
3/6/1937 - 3/31/1938	-54.5	390
11/9/1938 - 4/8/1939	-26.18	150
10/25/1939 - 6/10/1940	-31.95	229
11/9/1940 - 4/28/1942	-34.47	535
5/29/1946 - 5/17/1947	-28.78	353
6/15/1948 - 6/13/1949	-20.57	363
8/2/1956 - 10/22/1957	-21.63	446
12/12/1961 - 6/26/1962	-27.97	196
2/9/1966 - 10/7/1966	-22.18	240
11/29/1968 - 5/26/1970	-36.06	543
1/11/1973 - 10/3/1974	-48.2	630
11/28/1980 - 8/12/1982	-27.11	622
8/25/1987 - 12/4/1987	-33.51	101
3/24/2000 - 9/21/2001	-36.77	546
1/4/2002 - 10/9/2002	-33.75	278
10/9/2007 - 11/20/2008	-51.93	408
1/6/2009 - 3/9/2009	-27.62	62
Average	-35.68	299

Source: Ned Davis Research, 1/19. Past performance is no guarantee of future results. Investors cannot directly invest in an index.

Curious how a Bear Market may impact your financial plan? Contact us for a free strategy session or visit ProsperiFi.com for more intelligent financial insights. 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There can be no guarantee that strategies promoted will be successful

1 Source for bear/bull market stats is Ned Davis Research as of 12/31/18.
2 The S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.
3 Source: Ned Davis Research, 2/18. Time period referenced is 1/2/1998-12/31/2017. 
4 Source: National Bureau of Economic Research, 1/19 

Investing involves risk, including the possible loss of principal. • Diversification does not ensure a profit or protect against a loss in declining market.

Hill Climb or Crash - What will markets do next?

There are clearly many concerns where markets are headed across the globe. A quick search on “US Recession” will bury you with an abundance of headline grabbing results. Global growth is slowing as indicated by various manufacturing and spending data points. China trade tensions continue, and possible political shocks plague the US as well as developed economies across both coasts. Throw in the uncertainty that central banks have left us with, including the recent Federal Reserve decision to halt interest rate increases. It seems like many feel misguided and generally confused. I believe a different story is unfolding and the risks are in the Federal Reserves halt of interest rate policy. Their actions clearly indicate that the future economy cannot grind forward, and that was clearly the case in late 2018. That’s when many markets took the elevator down and experts were warning of a deep bear market. Sidebar: if you’d like to brush up on your bear market history, check out my earlier post here. So, what do interest rates have to do with markets? Well there has been a long-standing debate that stock prices are being propped up with low rates. Cheap borrowing has caused a debt bubble that could potentially get expensive to service if (and when) rates do move significantly higher. If my view of continued growth, even slow growth, continues, then the Fed may be forced to throw a rate hike out there. Catching many investors by surprise and bringing back 2018 like moves that hurt account balances. All in all, rates should be rising. That’s the bottom line. Growing deficits driven by government spending, inflation creeping up with rising wages and fewer foreign investor wanting to buy US debt all add up to higher rates. Possibly, of course. I believe this is an opportunity to take a proactive stance with portfolio’s and look at what may be sensitive to interest rate moves. Considering “Quality” at the individual holding level is also a factor to consider with what you own. There will come a time when central bankers, the Federal Reserve included, will simply not be able to hold things up. It will have to come down to profitability and future cash flow. Think of the basics, and it’s a matter of time when that happens. US GDP Growth by Consumption                 Our strong labor market and consistent consumer spending may continue to support our economy while political tensions and massive government spending continue. I like to ‘err on the side of caution and plan, rather than react to the next shock. No strategy works in every environment, but you can possibly increase your odds of success by knowing what you own and asking “what if things go bad, how will these positions hold up?” Very Healthy Labor Market                 Plus, remember that the crowd is expecting a recession within the next 18 months. This view is already priced into markets, assuming you believe in efficient markets. If you consider various indicators (see image below) you’ll see that conditions are not supportive of a recession in this time frame. US Recession Watch March 2019             With Britain’s (drawn out) departure from the European Union, China’s economy slowing and many countries facing political strains, the United States continues to be a foundation in the global investment community. Many eyes will be on data points and more clarity of what the future looks like. I am betting on underlying US strength to pull us through while the headlines sort themselves out. In the meantime, you can take a proactive stance to your money and look for quality to protect yourself from future surprises. Your guess is as good as mine on what that will be, but things aren’t as bad as they sound, for now. Curious how a recession may impact your financial plan? Contact us for a free strategy session or visit ProsperiFi.com for more intelligent financial insights.  The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There can be no guarantee that strategies promoted will be successful Investing involves risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss in declining market.