{"id":9294,"date":"2022-10-10T15:59:31","date_gmt":"2022-10-10T15:59:31","guid":{"rendered":"https:\/\/zacksim.com\/financial-professionals-insights\/?p=9294"},"modified":"2022-10-10T15:59:45","modified_gmt":"2022-10-10T15:59:45","slug":"what-to-expect-in-a-bear-market","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/what-to-expect-in-a-bear-market\/","title":{"rendered":"What to Expect in a Bear Market"},"content":{"rendered":"\n<p>Investors have a few useful tools for understanding bear markets. Experience is one of them \u2013 if you\u2019ve lived through many different bear markets, you have likely seen the downdrafts, recessions, volatility, and a general sense of confusion (and sometimes panic) in the media about what\u2019s happening.<sup>1<\/sup><\/p>\n\n\n\n<p>But it should also be true that you\u2019ve seen \u2013 and hopefully participated in \u2013 the even stronger bull market that has historically followed. From 1929 to 2021, there were 26 bear markets, which probably seems like a big number. But it\u2019s also true that there have been 27 bull markets over the same period, and they were all bigger than the bear that preceded them. From 1929 to 2021, the average bear market resulted in a -36% decline for stocks, while the average bull market resulted in +114% of gains.<sup>2<\/sup><\/p>\n\n\n\n<p>Experience is key, but knowing what type of bear market we\u2019re in can also help investors understand what to expect. There are three main types of bear markets:<\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><strong>Structural \u2013 <\/strong>these bear markets are caused by severe dislocations, typically in financial markets, and are often associated with \u2018bubbles.\u2019 The 2008 Global Financial Crisis is an example of a structural bear, which often takes several years to fully recover from.<\/li><li><strong>Cyclical \u2013 <\/strong>these bear markets are more closely tied to the business cycle, and often coincide with a peak in profit margins, rising interest rates, elevated inflation, and\/or deceleration in economic growth.<\/li><li><strong>Event-Driven \u2013 <\/strong>event-driven bear markets are triggered by an extraneous, almost always unexpected shock. The Covid-19 pandemic is a perfect example of an event-driven bear market, as investors quickly anticipate immediate and elevated risks to earnings and growth.<\/li><\/ul>\n\n\n\n<p>In terms of magnitude and duration, structural bear markets tend to be the most painful. Post-World War II, structural bears averaged about -50% declines over approximately two years, which lines up reasonably closely with what we saw in the 2008 Financial Crisis.<\/p>\n\n\n\n<p>Cyclical and event-driven bear markets, on the other hand, average about -30% declines over generally shorter periods. Since World War II, cyclical bears have lasted on average a little over a year, while event-driven bears have usually spanned about six months.<\/p>\n\n\n\n<p>In my view, we\u2019re currently in month 10 of a cyclical bear market.<\/p>\n\n\n\n<p>The stock market appears to be pricing in the impact of higher interest rates and inflation on future earnings, which has led to multiple contractions even as earnings have, to date, held up reasonably well. I see stocks anticipating that higher rates, inflation, and a higher likelihood of recession will result in peaking profit margins and corporate earnings, which help explain the greater than -20% declines year-to-date.<\/p>\n\n\n\n<p>There are some silver linings to this assessment, however. The first is that the market\u2019s current declines are in the range of what we\u2019d expect to see in a cyclical bear market, which could indicate that anticipated weakness in corporate earnings and economic growth is largely priced-into stocks at this stage.<\/p>\n\n\n\n<p>The second takeaway is that cyclical bear markets tend not to have the same systemic problems we see in structural bears, the latter of which usually feature tight credit markets and too much leverage in the private sector. In my view, we have virtually the opposite today \u2013 U.S. household and corporate balance sheets are strong, jobs are plentiful, and while credit spreads have risen of late, investment-grade corporations still have relatively easy access to capital markets. Banks are also very well capitalized.<\/p>\n\n\n\n<p>While these positive fundamentals do not necessarily ensure the U.S. will avoid recession, I think they do provide a buffer against a mild recession turning into something more severe, which I also think means avoiding the types of declines we might expect from a structural bear market.<\/p>\n\n\n\n<p><strong>Bottom Line for Investors<\/strong><\/p>\n\n\n\n<p>Over the past 80+ years, the S&amp;P 500 has generated approximately +11% in annualized returns. Most investors would be very pleased with this level of return over the span of their investment lives. This is why it is very important to always remember: this +11% annualized return <em>includes all of the bear markets over the last 80 years.<\/em><\/p>\n\n\n\n<p>To be sure, this doesn\u2019t mean investors should set and forget portfolios \u2013 there are many ways to control risk and volatility while pursuing alpha over time. But it does underscore the benefit of understanding how bull and bear markets have worked over time, which in the current environment should reaffirm how essential it is to participate fully in the rebound when it happens. And if my assessment that this is a cyclical bear market is correct, it shouldn\u2019t be long.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Knowing the different types of bear markets, how long they last, and how to respond can help investors weather these downturns.<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[181,1],"tags":[],"class_list":["post-9294","post","type-post","status-publish","format-standard","hentry","category-financial-professionals","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9294","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=9294"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9294\/revisions"}],"predecessor-version":[{"id":9296,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9294\/revisions\/9296"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=9294"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=9294"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=9294"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}