Every Bear Market is Different

By Charlie Bilello

24 May 2022

It’s official: the Bear Market of 2022. The S&P 500 has now fallen 20.9% from its high in early January, the largest decline for the index since March 2020.

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The question everyone’s asking: what happens next?

To answer that, we often look back at history, attempting to find parallels with the past.

But even a cursory glance at a table of prior bear markets reveals the difficulty in doing so, as the lack of any consistent pattern is evident.

A bear can take on many forms…

1) Short and Shallow

All bear markets are painful, but if you had to choose one, this would be it.

We’ve seen many short and shallow bears in recent history, including 2020, 2018, 2011, 1998, 1990, and 1987. All of these bears lasted 5 months or less from peak to trough with a maximum decline of 36% in 1987. And with the exception of 1987, all experienced fast recoveries, hitting new all-time highs within a year of the low.

2020 Bear Market (-35%, 1 Month, Recession)

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-2018 Bear Market (-20%, 3 Months, no Recession)

-2011 Bear Market (-22%, 5 Months, no Recession)

1998 Bear Market (-22%, 3 Months, no Recession)

-1990 Bear Market (-20%, 3 Months, Recession)

-1987 Bear Market (-36%, 2 Months, no Recession)

2) Long and Deep

When most investors hear the phrase “bear market,” the long and deep variety is likely what comes to mind. The financial crisis and the bursting of the dot-com bubble both lasted more than a year (17 and 31 months) with over 50% losses. More seasoned market participants may recall the 1973-74 bear market which took 21 months to bottom, cutting the S&P 500 in half.

With steeper declines come much longer recovery times. After the 1974/2002/2009 lows, the S&P 500 did not hit new highs again until 1980/2007/2013.

2007-09 Bear Market (-58%, 17 Months, Recession)

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-2000-02 Bear Market (-51%, 31 Months, Recession)

-1973-74 Bear Market (-50%, 21 Months, Recession)

3) The Steady Drip

You probably aren’t thinking about the “steady drip” type of bear market because we haven’t experienced it in 40 years, but it’s another possibility to consider. In 1980-82, there was a long bear market (22 months) that featured a steady drip lower, declining 28% from peak to trough. This is the complete opposite of what we saw in the 2020 bear that lasted only 1 month but lost 35%. Another interesting feature of the 1980-82 bear was how quickly the market recovered, with the S&P 500 hitting a new high in November 1982, only 3 months after the low.

-1980-82 Bear Market (-28%, 22 Months, Recession)

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4) The Worst of All Worlds

There’s one bear market that’s feared above all others: the 1929-32 decline during the Great Depression. It started out in a similar fashion to 1987, with an epic crash that took the stock market down 45% in a just a few short months. From there it would proceed to rally 47% in the most epic fake-out in market history, only to turn back down once again. By the low in June 1932, the S&P was 86% below its 1929 peak, and investors didn’t see a new high again until 1954.

-1929-32 Bear Market (-86%, 33 months, Depression)

Which of the 4 types of bear markets are we in today?

Unfortunately, that’s a question that can only be answered with the benefit of hindsight.

The study of history can inform us of what could possibly happen, but never what will happen.

Whether a bear market is short and shallow or something worse has often hinged on whether the US enters a recession, which has yet to be determined.

If we can avoid an economic downturn, as we did in 10 previous bears (see table below), we’re more likely to see a shorter and shallower decline (-29% over 12 months on average).

On the other hand, if we’re entering a recession, the odds seem to favor a longer and deeper bear market (-42% over 16 months on average) than what we’ve witnessed thus far (-21% over 4 months).

But these are just simple averages; there’s much variability within the dataset.

The recessions in 1948-59, 1957-58, and 1990-91 all saw stock market declines of 20-21%, similar to many of the non-recessionary bear markets. And this doesn’t even include the 1980 recession (January – July 1980) in which stocks only declined 17% (February-March 1980) or the 1945 recession (February – October 1945) in which there was no significant stock market decline at all.

So while not likely, a recession could be coming without stocks declining much more than they already have. Given the fear out there, it’s safe to say that most investors are probably not envisioning one of these more benign scenarios. They are more likely fearing something much worse, a repeat of the 50%+ recessionary bear markets of 2000-02 and 2007-09.

While that’s certainly a possibility, so is a shallower decline accompanied with a recession, or no recession at all.

Every bear market is different, and the full story of the one we’re living through today has yet to be written.

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