You probably don't need me to tell you this, but it's been a difficult year for Wall Street and investors. When the closing bell tolled on Monday, June 13, the iconic Dow Jones Industrial Average (^DJI -0.12%) and benchmark S&P 500 (^GSPC -0.58%) had tumbled 17.1% and 21.8%, respectively, since hitting their all-time highs during the first week of January. This officially placed the S&P 500 in a bear market, which is traditionally defined as a decline of 20% or more from a recent high.
The growth stock-driven Nasdaq Composite (^IXIC -1.15%) has performed even worse. After hitting a record high in November, the index has gone on to shed 32.7% of its value. This decline is effectively on par with the drop the Nasdaq endured during the March 2020 coronavirus crash.
Image source: Getty Images.
With two of the three major U.S. indexes now in a bear market, the prevailing question is: How long do bear markets last?
Here's how long the typical bear market lasts
To be completely clear, the only true answer is that we don't know. We'll never know ahead of time precisely when a bear market or correction will occur, exactly how long it's going to last, or how much the indexes are going to fall. In many instances, it's impossible to predict what catalyst will cause a crash or correction in advance of one occurring.
However, we do have copious amounts of data that can allow investors to make educated guesses at how long or how steep a move lower in the Dow Jones, S&P 500, or Nasdaq Composite might be. For this, I turn to S&P 500 correction and bear market data aggregated by Yardeni Research (link opens PDF).
Since the beginning of 1950, there have been 11 bear market declines in the S&P 500. When I say "bear market decline," I mean a 20% or greater drop. This means the 19.9% pullback in 1990 and 19.8% dip in the fourth quarter of 2018 are nothing more than steep corrections. Excluding the current bear market, since we don't know how long it'll last, here's how long the previous 10 bear markets took to find their respective bottoms:
- 1957: 99 calendar days
- 1962: 174 calendar days
- 1966: 240 calendar days
- 1968-1970: 543 calendar days
- 1973-1974: 630 calendar days
- 1980-1982: 622 calendar days
- 1987: 101 calendar days
- 2000-2002: 929 calendar days
- 2007-2009: 517 calendar days
- 2020: 33 calendar days
Altogether, this equates to 3,888 calendar days spent in a bear market over the past 72-1/2 years. On average, the typical bear market has taken 388.8 calendar days, or about a year and three weeks, to reach its trough.
Modern-era bear markets offer a give-and-take for investors
Although no two bear markets are alike, the previous 20%+ drops do offer a pretty big clue as to what investors can potentially expect with the S&P 500 mired in a steep decline.
If there's a silver lining, it's that the frequency of bear markets has noticeably dropped in what I like to call Wall Street's "modern era." Before the mid-1980s, computers weren't as common on Wall Street as they are today. Without widespread automation, transmitting trade data, and even disseminating news from Wall Street, took time. This allowed rumors and speculation to persist, which contributed to six bear markets in a span of just 25 years (1957-1982).
Comparatively, there have been only four bear markets since the end of 1987 (including the existing decline). Breaking down the information barriers between Wall Street and Main Street has been highly effective at keeping the bears at bay in the modern era.
However, modern-era bear markets tend to last longer when they do occur. For example, the dot-com bubble took almost 300 calendar days longer than any other double-digit decline since 1950 to find its trough. Meanwhile, the 517-calendar-day Great Recession bear market was the longest pullback, aside from the dot-com bubble, since 1982.
If we use this data as a roadmap, it suggests that the current bear market could last longer than the historic average. However, it also implies that a long bull market could follow.
Image source: Getty Images.
Three ways to thrive when investing in a bear market
While big down days and large unrealized losses in the short term can weigh on an investor's psyche, it's important to understand that every crash, correction, and bear market throughout history has eventually been cleared away by a bull market rally. It may take some time, but patient investors who are buying during this bear market are likely to be rewarded.
When investing in a bear market, three strategies can reduce your downside exposure and boost your long-term return potential.
First, let dollar-cost averaging be your friend. Dollar-cost averaging is purchasing stocks at regular time intervals, regardless of price, or buying at specific price points, regardless of what the broader market is doing. This is a way for investors to edge into or build stakes in companies they believe will outperform over time. It's an especially smart investing strategy given that most online brokerages have abandoned commission fees and minimum deposit requirements.
Second, gravitate toward dividend stocks. Companies that pay a dividend are almost always profitable and time-tested, which means they've navigated their way through recessions and/or sizable market pullbacks before. It also doesn't hurt that income stocks have, historically, vastly outperformed non-dividend-paying stocks over long stretches.
The third strategy that can help you thrive in a bear market is buying defensive stocks, or companies that operate in a basic need industry. Companies that provide electricity, water, or waste management are basic necessity services that shouldn't be affected on an operating basis by volatility on Wall Street. Similarly, consumer goods stocks that focus on non-discretionary food and household items, as well as healthcare companies, are defensive stocks that can outperform in a plunging market.
