Six facts about a bear market

Six facts about a bear market

US stock markets are again toying with bear market territory, now off more than 18% from their January peaks. Renewed concerns about still-hawkish central banks and the energy crisis unfolding in Europe have seen the benchmark S&P 500 Index decline 18.2% to date and the Nasdaq slide a hefty 30%.

Risk aversion gathered pace in the wake of the Jackson Hole central bank get together, with the S&P 500 losing 6.5% over the past week as investors hunkered down for a prolonged period of high – and rising – interest rates.

However, before you give into the temptation of de-risking your portfolios in response to recent events and fears of the future, remember, if you invest with a long time horizon, you should expect – and be prepared – to face rough markets.

Bear markets come around historically every 3.5 years. They are psychologically tough.

They are always emotionally challenging. However, throughout history they have been relatively short-lived. Here are six facts about bear markets that put them into perspective.

  1. They are common.

There have been 26 bear markets in the S&P 500 Index since 1928. And there have been 27 bull markets over the same period. Despite the deeply uncomfortable psychological impact that they have, they have always served as opportunities for long-term investors to get in to the market more cheaply than in a bull market.

  1. They are short.

The average length of a bear market is 290 days, or about 9.5 months, which is far shorter than the average length of a bull market, which is nearly 3 years. Some bear markets have lasted over a year, however.

  1. They can be severe.

Drawdowns in a bear market are between 30-40% on average. The current bear market is nearly 22% down, although it is impossible to know if this bear market will end up on the lower or higher end of the average.

  1. They are psychologically challenging.

Investors feel losses more intensely than they perceive gains. This affects our investing behaviour and our psychological journey through tough periods.

  1. It pays to stay put.

The worst thing to do now is hop from stock to stock, or fund to fund. There is always a cycle, and it’s your time horizon that determines your returns. As a cautionary tale, half of the market’s strongest days in the last 20 years occurred during a bear market. Another 34% of the market’s best days occurred in the first two months of a bull market – before it was clear that a new bull market was underway.

  1. Despite the emotional roller coaster, remember that markets tend to rise over time.

Over the last 100 years, bear markets made up only a fifth of those years. Put differently, for most of the last century, stocks have been on the rise c.80% of the time. Often investors miss out on the market’s overall gains because they try to time getting in and out of the market, missing the most important days.

While declining values can be difficult to stomach, it’s important to keep in mind that market downturns have always been a part of the investment process. Few can consistently predict when down markets are going to occur, and investors should always be appropriately placed to deal with them.

Most importantly, investors must understand that bear markets have always been opportunities to build wealth. While share price declines seem negative, they are in fact enormous opportunities for those with a long-term time horizon.

Article by Pieter Hundersmarck – Portfolio Manager at Flagship Asset Management

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