While the possibility of recession has been looming on and off1 in the recent years following the COVID-19 pandemic , it’s important to understand that falling stock prices don’t necessarily indicate a recession is on its way. Often, when prices drop for an extended period, it indicates a bear market. So, what’s the difference between a bear market and a recession?
What is a Bear Market?
A bear market is a prolonged period of declining stock prices, generally defined by an overall market drop of 20% from a recent high. Many factors can trigger a bear market, including economic downturns, geopolitical events, or investor sentiment. The most recent bear market in the U.S. ran from January through October 2022, with the S&P dropping as much as 25%. Since the S&P 500 index launched in 1957, the country has experienced 12 bear markets2.
Figure 1: History of U.S. Bear and Bull Markets
Characteristics of a Bear Market
Key characteristics of a bear market include:
- A sharp market decline of 20% or more from a recent peak
- Sustained duration of several months or even years
- Negative investor sentiment, leading to sell offs and further market decline
- Rising unemployment and declining GDP
- Market volatility
What is the Average Bear Market Length?
The average bear market length since 1928 has been 9.6 months. The worst bear market on record took place during the Great Depression from September 1929 through June 1932, with the S&P falling more than 86%.3 However as shown in the Figure 1 above, following each downturn, the market has recovered to deliver significant gains for a duration surpassing the length of the preceding bear market.
Bear Market vs. Recession
So how do you tell the difference between a bear market vs. a recession? While the two can often be intertwined, as with the Great Recession in 2008, each are distinct economic phenomena. A bear market is a prolonged decline in stock prices, primarily affecting the equity markets. In contrast, a recession is a broader economic downturn characterized by a decline in GDP, rising unemployment, and reduced consumer spending.
Considerations for Weathering a Bear Market
While investors may often react to a bear market by wanting to hold onto their cash or liquidate their investments, we believe there are other ways to get through a bear market that may include potential opportunities. Here are some tips we think are helpful to consider when weathering a prolonged market downturn:
- Be careful not to react hastily. It’s rarely a good idea to pull money out of the market when stocks are down, as you might suffer a permanent loss and miss opportunities when the market recovers. Over the long-term, most stock values grow, so exercise patience, and give the market time to normalize.
- Make sure you have a diversified portfolio. In addition to stocks, make sure your investment portfolio includes Treasury, corporate, and municipal bonds as well as foreign investments. A balanced portfolio can help you better weather downturns, especially if stock prices are volatile.
- Rebalance your portfolio regularly. Routinely reviewing the asset allocation in your portfolio may help preserve your long-term strategic goals and better protect your investments during a downturn. For example, if you’ve seen your stock holdings grow dramatically in value in a bull market, it may be time to look at investing in more bonds.
- Stay focused on the long-term. Markets go up and down, and a bear market, though it might feel stressful, isn’t going to last forever. Avoid making costly mistakes by selling off, stay in touch with your wealth advisor, and maintain your focus on your goals.
While bear markets can be unsettling for investors, we believe maintaining a long-term outlook is key to a sound investment strategy. An important role of an effective wealth advisor is to help clients maintain a long-term perspective so they do not make emotional decisions that may prove detrimental over longer periods. Your advisor can help you rebalance and diversify your portfolio by analyzing fundamentals and even identifying undervalued assets, so your investments are working for your long-term goals.
Everyone’s situation is unique but as we see it, being aware of how markets perform over various market cycles can be an important determinant to portfolio results over the long term. To learn more about protecting your assets during a bear market, contact the KAR team.
