Bulls, Bears and Corrections

Bear Market

One of the many challenges that investors face is keeping their composure when the financial markets enter a declining period known as a bear market.   As of this writing, we are experiencing the longest upswing (bull market) in modern U.S. stock market history. However, the wise stock market axiom is that “no tree grows to the sky” and at some time in the future, we will experience a bear market. But, what exactly defines a bull/bear market and how long do they last?

There’s no official definition of either term, but the consensus is that a market drop of 20% or more from the most recent high price level qualifies as a bear market.  Conversely, a bull market is a rebound of 20% or greater from a low point.  Market pundits also refer to a 10% decline from a recent high as a “correction” and it’s possible to have multiple corrections within a multiyear bull market without triggering bear market status.

While it’s easy to view the ups and downs of the markets from a distance, it’s another thing to live through them.  Staying the course and resisting the temptation to abandon your long-term investment plan takes courage.  However, it’s comforting when we are reminded that time is on our side when investing.  Since 19261, bull markets have lasted an average of 82 months while bear markets rebound after an average of 23 months.

Likewise, the magnitude of the upturns after a bear market ends is reassuring as well.  The average one year return of the Standard & Poor’s 500 after a bear market is 49.0%.  The comparable average annual returns for the 3, 5 and 10 year periods are 23.7%, 20.0%, and 14.7% respectively.  Keeping this data in mind makes it easier to keep investing via 401k and other automatic purchases programs because the returns after downturns are so strong.  The famed investor Warren Buffet has noted: “that people who are net accumulators of stocks should actually be rooting for lower prices.”  While past performance cannot guarantee future results, Warren’s advice is definitely worth remembering.

1Sources: Fact Set and T. Rowe Price