When Will the Bear Market Hit Bottom? These Metrics May Hold Clues

Inflation accelerated to a four-decade high this year, fueled by pandemic-era stimulus payments, supply chain disruptions, and geopolitical conflict. In an effort to cool the economy, the Federal Reserve has started shrinking its balance sheet and enacted a series of aggressive interest rate hikes. In fact, rates are rising at the fastest pace since the 1980s, according to The Wall Street Journal.

Those events have investors worried. If the Fed tightens its monetary policy too quickly, it could throttle economic growth and throw the U.S. into a recession. But scorching inflation could lead to the same outcome if the Fed moves too slowly. Those concerns have caused a sharp decline in the stock market. The S&P 500 fell into a bear market in June, and the broad-based index has now declined for three consecutive quarters -- which hasn't happened since 2009.

Currently, the S&P 500 is 22% off its all-time high, though the index was down as much as 25% just recently. Those brutal losses have many investors wondering when the stock market will reach its bottom. Unfortunately, there is no surefire way to recognize the end of a bear market, but historical data and investor sentiment may hold some clues.

Here's what investors should know.

Data by YCharts.

Bear markets in the last five decades

The S&P 500 has been in a bear market eight times in the last five decades, or seven times excluding the current situation. It's worth mentioning that no two downturns are the same -- they vary dramatically in terms of severity and duration -- but investors can still gain some perspective by studying past bear markets.

The chart below provides details on every S&P 500 bear market that has taken place in the last five decades based on data from Yardeni Research.

Data source: Yardeni Research..

Investors should note the dramatic variation between the dot-com market crash in 2000 and the coronavirus crash in 2020. In the former, the S&P 500 declined for more than two-and-a-half years before reaching a bottom. But in the latter, the index bottomed out in just a month. That said, it took an average of 472 days for the S&P 500 to bottom during bear markets over the past five decades.

To be clear, an S&P 500 bear market begins on the date the index peaks before losing at least 20% of its value. For instance, the S&P last peaked on Jan. 4, 2022 -- about 295 days ago -- so that is the official start date of the current bear market. That means we are still six months away from the average bottom. Put another way, if the current bear market falls precisely in line with the average, the S&P 500 won't hit a bottom until April 2023.

Investor sentiment

Investor sentiment is another variable worth considering. After all, stocks tend to rise when most investors are feeling optimistic, and stocks tend to fall when most investors are feeling pessimistic. That means the current bear market will end whenever investor sentiment shifts back in the other direction.

Of course, there are many ways to gauge investor sentiment, but I like to track the percentage of S&P 500 stocks trading above their 200-day moving average. In late September, just 10.6% of stocks in the S&P 500 were trading above their 200-day moving average. That figure has only fallen below 15% during five other downturns in the last two decades. Here is a brief overview of each incident:

The bear market of 2000: The S&P 500 entered a bear market in March 2000, and it bottomed in Oct. 2002, down more than 49% from its high. When the market closed on July 23, 2002, only 3.2% of stocks in the S&P 500 traded above their 200-day moving average.

The bear market of 2007: The S&P 500 entered a bear market in Oct. 2007 and bottomed in March 2009, down more than 58% from its high. During those years, the portion of stocks in the S&P 500 trading above their 200-day moving average fell below 15% on several occasions, but that figure reached a low of 1% on March 6, 2009.

The market correction of 2011: The S&P 500 entered correction territory in April 2011 and bottomed in Oct. 2011, down more than 19% from its high. When the market closed on Aug. 8, 2011, just 8.6% of stocks in the S&P 500 traded above their 200-day moving average.

The market correction of 2019: The S&P 500 entered correction territory in Sept. 2018, and it bottomed out in Dec. 2018, down nearly 20% from its high. When the market closed on Christmas Eve, just 10.8% of stocks in the S&P 500 traded above their 200-day moving average.

The bear market of 2020: The S&P 500 entered a bear market in Feb. 2020 and bottomed one month later, down nearly 34% from its high. When the market closed on March 23, 2020, just 3.2% of stocks in the S&P 500 traded above their 200-day moving average.

Here is the takeaway: The S&P 500 has fallen sharply this year, and the portion of stocks in the index trading above their 200-day moving average is quite low -- signaling that investors are very pessimistic -- though it has been much lower in each of the last three bear markets. That means it could certainly continue to fall in the coming months.

That said, any investor that bought an S&P 500 index fund throughout the downturns discussed above is almost certainly better off today, especially if they were buying when fewer than 15% of stocks in the index traded above their 200-day moving average. From that perspective, now is a good time for patient investors to buy stocks, regardless of when the bear market actually reaches its bottom.