Bear markets are typically understood as a decline in a stock market index of at least 20% from its high. The S&P 500 hit its all-time high on January 3rd of this year and entered bear territory on June 13th.
A popular theory is that declining markets get their name from the way bears attack prey—by swiping paws downward. By contrast, rising markets are called “bull” markets because bulls attack by thrusting their horns upward.
General causes include slowing economic growth, rising inflation, geopolitical crisis, high valuations, spikes in commodity prices, and rising interest rates—all of which are currently present.
While bear markets are painful, they are also a normal part of market cycles. On average they occur every 4 to 5 years although the time frame can vary considerably. Since 1928 there have been 27 bear markets.
Bear markets can be short or long term, varying from a few months to several years. The shortest bear market lasted just 33 days in early 2020 and was brought on by the turmoil and uncertainly surrounding the Covid-19 pandemic. An average length is approximately 10 months, although it’s impossible to predict how long the current downturn will last. The good news is that, in the U.S., bear market duration is typically much shorter than the bull markets that precede and succeed them.
It can’t be accurately predicted, although we can anticipate that high market volatility will continue. On average the S&P 500 declines approximately 36% during a bear market, but in the 2007-2008 downturn it lost over 50%. While those losses are painful, it’s good to keep in mind that, during bull markets, stocks have gained an average of 114%. Over the long term, the bulls have consistently beaten the bears.
There is no consensus on this. While bear markets typically accompany a slowing economy, that doesn’t mean that a recession is inevitable. A recession is defined as at least two successive quarters of declining Gross Domestic Product. The Federal Reserve foresees continued growth in the economy albeit at a slower rate, while other economists say that a recession is likely on its way. Only time will tell who is right.
Investors typically look for a 20% gain from the low point in the index. Only in retrospect will we know when a low point was reached in the current bear market.
While the Pension Boards’ investment team has taken a number of steps to minimize the impact of a market downturn, it’s important to note that we invest for the long-term—we do not engage in panic selling or buying reactively.
Consider that $10,000 invested in the S&P 500 on January 3rd, 2000, and left untouched until December 31st, 2019 would have grown to $34,421. If, however, an attempt was made to time the market and the 10 best days of gains were missed, the investment would have grown to just $16,180—less than half. If the 30 best days over that 20-year period were missed, money would have been lost; the investment would be worth only $6,479.
Speculating on market timing is a losing proposition. The Pension Boards’ disciplined, long-term approach to investing has served our members well for over a century.
First, don’t panic! Again, bear markets are normal; we always emerge from them, and the market moves higher.
Second, consider investing in one of the Pension Boards’ Target Annuitization Date (TAD) funds if you haven’t already done so. TAD funds offer a simple investment solution that rebalances the asset allocation and risk of a member’s portfolio using a “glidepath” tool for the member’s life stages. The asset mix of equities, fixed income, and cash becomes more conservative as the target date (typically the date near to one’s expected retirement) approaches. Investing in a TAD fund leaves asset allocation in the hands of experienced professionals.
Third, take advantage of financial planning services through Ernst & Young (EY) Financial Planning Services. As a Pension Boards member, you have access to free, confidential, and unlimited financial guidance from an EY financial planner. EY financial planners do not sell investments or insurance; they deliver independent, objective, and confidential financial education to help improve your financial wellness.
For more detailed information on the current economic situation from our investment team, please see the most recent Market Update.