Despite the S&P 500 notching new all-time highs in March, many investors remain hesitant following the bear market doldrums of 2022.
Major indices had several fake breakouts during the decline, so you might wonder, "Are we still in a bear market today?"
This article will define bear markets and examine how they affect stocks and investor psychology. We'll also look over a few warning signs that often precede drawdowns.
Key Takeaway
A bear market is an extended market decline of at least 20%, usually measured with the S&P 500 as a proxy for American stocks. Bear markets tend to last less than a year, but the average drawdown is about 35%, and investors should have a plan for when they occur.
Are We in a Bear Market?
Bear markets are unavoidable in investing, but there's little reason to fear or panic about them. Bear markets are a natural part of the market cycle and often "clean out" excessive frothiness and speculation.
But are we currently in a bear market?
No, the most recent bear market in the U.S. stock market officially ended when it reached new all-time highs in January 2024.
Using the SPDR S&P 500 ETF Trust (NYSE: SPY) as a proxy for the stock market, you can see how the drawdown only lasted until winter 2022, but the recovery to new highs didn't complete until earlier this year. Despite a 26% gain in 2023, investors who bought stocks at the December 2021 peak didn't break even for two years. Two years might not seem long in the grand scheme, but an investor dealing with uncertainty can feel like speed running an entire decade in 24 months.
Long periods of sideways price action are often the most brutal for investors as bear market rallies taunt the end of the drawdown, only to fade out and continue trending downward. Many investors believed the bear market was ending following a summer rally in 2022, but the trend remained bearish, and the rally fizzled as summer faded.
Extended bear markets can be tricky, but they're merely one flavor of decline. The phrase "stocks take the stairs up and the elevator down" was never more accurate than in 2020, when the COVID-19 pandemic shocked markets and sent the S&P 500 tumbling 35% quickly.
Investors saw major market indices erase years of gains in less than six weeks as panicked participants pummeled the sell button on their brokerage apps. However, this bear market was over quickly due to unprecedented monetary and fiscal policy — just five months after the S&P 500 bottomed in late March 2020.
Bear markets are often associated with broad market drawdowns, but asset classes and individual securities can also experience bear markets. Japanese stocks famously spent nearly 40 years in a bear market following their 1990s real estate bubble, and the Nikkei stock index didn't reclaim all-time highs until 2024.
Bear Market Indicators
Are we in a bear market right now? Here are a few indicators investors should monitor market conditions more closely.
Credit Spreads
Not to be confused with the options trading strategy, credit spreads are often a warning sign that a bear market is on the horizon. Credit spreads are simply the difference in yield between two fixed-income assets of equal duration. Corporate and government bond spreads are often used for economic analysis to determine market health.
If two-year corporate bond yields accelerated compared to two-year Treasuries, that widening spread could indicate that private sector lending is becoming riskier.
Yield Curve
If you're asking, "Are we in a bear or bull market?" the yield curve is a data point to consider. The yield curve is the short- and long-term bond slope, measured with Treasuries. Long-term debt usually yields more than short-term debt, but the yield curve becomes inverted when short-term yields rise above the long-term rate. An inverted yield curve is one of the oldest and most accurate bear market indicators, but investors must still consider other factors in their analysis.
Economic Data
Plenty of bear markets happen without a full-blown economic recession, but data from the broader economy and consumer sentiment can hint at future market direction. For example, rising credit card delinquencies and late loan payments could be signs that consumers are weakening or could be seasonal noise or variance. However, economic data is still a puzzle when determining market resilience.
Fundamental and Technical Signals
Finally, reasonable old-fashioned due diligence can help detect stocks in a bear market. Corporate earnings are always a significant factor in stock analysis, but technical tools like moving averages can also help investors prep for potential downturns. For example, if a major market index like SPY sees its 50-day moving average cross under the 200-day moving average, this is interpreted as a bearish signal.
Use MarketBeat’s stock screener to look for companies based on specific fundamental or technical data.
Understanding Market Cycles
The market cycle is the natural ebb and flow of finance and why investors get rewarded for taking risk in the first place.
Are we in a bear market now? If so, how would you position your portfolio in the future? Investors must understand the cyclical nature of markets to keep emotions in check. Selling stocks after a decline can result in a permanent loss of wealth, but buying at all-time highs can also create jittery investors (despite evidence that more all-time highs often follow all-time highs).
Having rules for your portfolio, like profit targets, loss limits and asset allocation weights can help offset bear market turbulence.
Advantages of a Bear Market
Bear markets aren't always bad news, especially if you're a young investor with a long time horizon. The average bear market lasts just over nine months, while the average bull market lasts between two and three years. When bear markets occur, long-term investors can use cheaper stock prices and buffer their portfolios.
Additionally, bear markets are often necessary. They clear out market froth and overexuberance, forcing companies to concentrate on profits and earnings. Bear markets frequently end speculative manias and sniff out mismanaged companies. Plus, pump-and-dump scammers usually exit the market when deep declines occur.
Advantages of a Bull Market
What are the benefits of a bull market?
Profits!
While economists are fond of saying that the stock market is not the economy, it's rare for markets to decline during economic booms, and bull markets usually signal increasing profits and investor optimism. Bull markets can be lengthy and impressive, like the post-GFC recovery when the S&P 500 posted annual gains for 6 consecutive years.
Bull markets mean growth and accelerating stock prices, which is good for companies, investors, institutions and retirement savers. However, bull markets can also lead to excessive speculation and risky behavior, often setting the stage for the next bear market.
The Psychological Impact of Bear Market Speculation
Investing during a bear market can be brutal on your psyche, especially ones that drag out like the 2022 drawdown. But bear markets are inevitable, and investors should prepare themselves. Raging bull markets inevitably fade, especially when speculation and irrationality send stock prices soaring past reasonable levels.
Financial media is full of headlines like, “Are we in a bull or bear market?” but these are short-term stories aimed at active investors. Plus, stirring up a little fear and uncertainty has never been bad for ratings, so the media tends to slant negatively regarding finance and markets.
Loss aversion and herd mentality often drive market reactions during bear markets, and these are difficult emotions to overcome. Loss aversion has been ingrained into human behavior for thousands of years, so losing money makes people anxious! Anxious investors also tend to outsource critical thinking, leading to further losses as more of the herd heads to the exit.
Debunking Bear Market Myths
Are we in a bear market today? Here are a few common misconceptions about bear markets to put your mind at ease:
- Bear markets always lead to recessions.
False. Bear markets occur far more frequently than recessions, and not every bear market is a signal that the economy is contracting. For example, markets declined 20% in 2018 despite real GDP growth of 2.9%.
- Bear markets last a long time.
The average bear market only lasts about nine months, compared to more than two years for the average bull market. Markets spend much more time going up than going down.
- Bear markets lead to catastrophic losses.
Calamities like the Great Depression, the dot com bubble and the 2008 global financial crisis left long-lasting scars on investor psyches. Still, most bear markets don't get names because they resolve themselves in an orderly fashion. A 20% to 30% loss isn't uncommon, and investors should be prepared for the occasional terrible year.
Strategies for Navigating Uncertain Markets
Are we in a new bull market, or are we in a bear market rally? If this question keeps you up at night, here are some tips to prevent making rash decisions in the face of uncertainty.
- Dollar-cost averaging: Buying stocks at a set monthly or quarterly interval is a timeless strategy. By dollar cost averaging, investors can resist trying to time the market while still benefiting from cheap stocks.
- Sticking to predetermined rules and goals: A few guidelines can help your portfolio management. For example, if you have a portfolio of 10 stocks, you might set a rule to sell shares of any stock that grows to more than 20% of the portfolio's weight. Or maybe you set a 10% loss limit to cut losers quickly. Rules replace emotions when constructing a portfolio.
- Stop checking prices: Go outside and touch some grass! Bear markets don't just harm your portfolio; they can harm your mindset and mood. If you find yourself grinding your teeth or clenching your fists over market action, stop checking stock prices and step away from the screen. An experienced investor shouldn't let a sudden price decline influence their plans and decisions.
Bear Markets Can Be Painful but Short-Lived
No one who lived through the Great Depression would say not to worry about bear markets. Bear markets erase wealth and can lead to more painful scenarios like recessions. But there's a silver lining — bear markets are necessary evils that eliminate froth and restore equilibrium.
They're also unavoidable, and investors should know how to react when they arrive. A rules-based investing system can help navigate drawdowns without causing stress and indecision.
FAQs
Are we currently in a bull or bear market? Here are a few critical facts about bear markets and their economic influence.
How long does a bear market last?
On average, a bear market lasts 289 days or just under 10 months. However, no two bear markets are identical; some are quick, like the 2020 COVID bear market, and some drag out for months, like the 2022 slowdown.
Are we currently in a bear or bull market?
After a significant drawdown in 2022, the S&P 500 gained more than 26% in 2023. As of this writing, the major US stock indices have breached their 2021 levels and hover close to all-time highs, signaling that a new bull market is underway.
Will the stock market recover this year?
The stock market has regained its footing following the 2022 bear market and hovers close to all-time highs. While the recovery has been broad, inflation remains sticky, and the Federal Reserve has hesitated to cut rates. Recent stock market performance has been impressive, but uncertainty still lingers.
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