Every parent with little kids who goes on a trip knows the inevitable question that will arise from the back seat: "Are we there yet?" And after hearing a negative response, the follow-up question is nearly always, "How long will it be before we are there?"
I don't think that the majority of investors are childish. However, many of us are asking the same questions that young kids ask -- except the subject is the stock market instead of a car trip.
Some are speculating that this may be the longest bear market in history. I don't think that's the case. There probably won't be a long bear market. Here are three compelling reasons why.
Image source: Getty Images.
1. Most major indexes aren't even in a bear market
There's one obvious argument against there being a historically long bear market. The reality is most major indexes aren't even in a bear market right now.
The definition of a bear market is when an asset falls 20% or more from its recent highs. The S&P 500 is currently around 15% below its previous high. The Russell 2000 small-cap index is down roughly 14%. The Dow Jones Industrial Average is only 7.5% or so below its previous high.
Sure, the Nasdaq Composite Index has been in bear market territory for months. But it's incorrect to say that "the stock market" is in a bear market when three of the four top indexes for U.S. stocks clearly are not.
2. Macroeconomic indicators are too positive
Could these other indexes plunge into bear markets soon? It's possible. However, even if it happens, I wouldn't bet on a long bear market. Macroeconomic indicators are simply too positive.
To be clear, I'm not arguing that all the macroeconomic indicators look great. For example, inflation remains higher than anyone would like. But recent reports seem to indicate that the Federal Reserve's interest rate hikes are helping to bring inflation under control.
Unemployment ranks as another key macroeconomic indicator. Again, there's good news. The U.S. unemployment rate in December 2022 was a historically low 3.5%.
Perhaps the U.S. economy could enter into a recession in 2023 and drag all the major indexes into a bear market. Some economists, though, think we could be in store for a "slowcession" instead with an economic slowdown that's relatively mild.
The unofficial definition of a recession is when gross domestic product (GDP) falls for two consecutive quarters. While such declines occurred in the first two quarters of 2022, U.S. GDP jumped 3.2% higher in Q3. The Fed currently projects Q4 GDP of growth of 3.5%. This trend certainly doesn't point to a sustained bear market.
3. History is against a lengthy bear market
Finally, history appears to be in investors' favor. The S&P 500 has fallen by 19.4% or more only seven times ever including the big decline in 2022. Of the six times the S&P plunged that much prior to last year, it roared back by at least 23.5% in the following year.
The broader picture looks encouraging, too. Between 1940 and 2021, the S&P 500 fell in 23 years. In 19 of the years after a decline, the index delivered a positive return.
There have been only two S&P 500 bear markets in the past that lasted longer than two years. The first occurred between 1930 and 1932 during the Great Depression. The second was in 2000 and 2002, a period in which the dot-com bubble burst and the worst terrorist attack on U.S. soil in history occurred. Are we likely to experience conditions anywhere close to those that led to either of these two long bear markets? No.
The answer many parents give when their children ask on a trip how long it will be before they arrive is something along the lines of "it won't be long." That's probably a good answer for investors wondering how lengthy a potential bear market might be.
