Like the seasons, boom and bust cycles are a natural and unavoidable part of both the stock market and the economy. And just as the winter months may be unpleasant for many, they eventually give way to warmer weather. Similarly, recessions and bear markets eventually stabilize and pave the way for economic expansions and bull markets.
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Bull and Bear Markets Are Not All the Same
The current public health crisis makes the current bear market unique and uncertain, with the S&P 500 still down about 12% for the year, but it too should eventually turn around.
More important, perhaps, is the fact that bull and bear markets are not created equal. Unlike the movement of the Earth around the sun, bull and bear markets don’t operate on a set schedule. Instead, economists and investors are like Punxsutawney Phil checking their shadows. There are many investors who constantly fear the onset of winter and, when it finally arrives, just as many who believe it will never be spring.
Bull Markets Typically Last Longer than Bears
The history of modern market and economic cycles suggests that while downturns may be abrupt, the subsequent expansions more than make up the difference. As the chart below shows, bear markets since World War II have lasted anywhere from 6 months to two-and-a-half years. During these periods, the U.S. stock market has fallen from 22% (1957) to 57% (the 2008 financial crisis) at their worst points.
In the chart below, you can see bear and bull markets since World War II. The left axis shows cumulative stock market returns during each period. Bull markets last much longer and experience much larger returns than bear markets.
Chart: Bear and bull markets since World War II.
In contrast, bull markets have lasted from about 2 years to over a decade, with the two longest cycles occurring during the past 30 years. These cycles have seen the stock market multiply in value many times over.
Most Recent Bull Market Brought Historic Return
The nearly eleven-year bull market that ended in March 2020 experienced a price return of 401% and close to 530% with reinvested dividends, based on the S&P 500. If seasons behaved like the bear and bull markets of recent decades, there would be beautiful weather 11 months out of the year.
Of course, past performance is no guarantee of future results, and the point is not that bear markets are insignificant. For those who live in colder climates, preparation is the key – but not at the expense of enjoying the summer months. Preparation when it comes to one’s portfolio means holding a balanced set of asset classes and focusing on longer-term trends.
The trends relating to the current bear market and recession due to the coronavirus will depend on how the economy begins to reopen and the challenging trade-off between public health and the economy. Tens of millions of jobs have already been lost, and stress is building for individuals, businesses, and local governments. Some of these job losses may be temporary depending on how quickly the economy reopens, but this is little consolation for those facing financial difficulties. The plateauing of COVID-19 cases in the U.S. and other countries returning to work are positive signs of potential green shoots over the next several months.
Focus on the Long View
While there will undoubtedly be very poor economic data, increased stock market volatility, and challenging times ahead for people and companies alike, it’s important to see the bigger picture when it comes to investor portfolios. Learn more about why it pays to stay focused on the long term here.