- The median gain during a recovery—at 77.5%—compares favorably to the median loss of 33.5%. Same goes for duration: the median recovery period is 633 days versus a median bear market length of 240 days.
- As active investment managers and asset allocators we view these environments in terms of the opportunities they offer.
Crossing the 20% mark on the way down—the formal threshold for a bear market—always instills a fresh sense of concern. This must be serious, but how bad will it get?
No one can credibly answer when or where this selloff will conclude. We can reference history, however, to see how other bear markets have behaved.
Declines come in all shapes, sizes and lengths.
We’ve explored declines in the S&P 500 Index that show a vast difference between small bears (declines of between 20% and 30%) and big bears (declines greater than 30%).
Going back to 1966, small bears have taken about 5½ months to recover from their troughs. Big bears are a different story altogether, with recoveries taking about 37 months.
Exhibit 1 uses data from all bear markets going back to 1929. We observed the two principal characteristics of declines: size (percent loss) and length (number of days from peak to trough). We calculated averages and medians given the susceptibility of averages to the influence of the largest numbers.
|Percent Loss||Number of Days|
September 7,1929 through March 23, 2020. Source: Yardeni Research, Inc., SEI. Performance of the S&P 500 prior to March 4, 1957 is backtested. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back-tested returns. Past performance is no guarantee of future results.
At about 160 days and counting, the current bear market is more than halfway through the median bear length.
Both the shortest and longest bears have occurred in the 21st century: the longest started in early 2000 as the dotcom bubble burst, and the September 11th attack took place about midway through the 2½ year span. Everyone still remembers the shortest—the COVID crash, which lasted from February to March 2020.
In terms of size, a 20% decline is well into the lower half of both the median and average losses. The largest loss—at a staggering 83%—dates back to the early 1930s in the teeth of the Great Depression.
Recoveries look like they’re worth the wait.
For all the attention that stock market declines receive, remember that equities spend a large majority of the time climbing.
This bear market will end, at one point or another, just like every selloff that has come before. Judging by the statistics in exhibit 2, there’s a high likelihood that the low point of this downturn will be followed by a much larger and longer recovery.
|Percent Gain||Number of Days|
June 12,1928 through January 3, 2022. Source: Yardeni Research, Inc., SEI. Performance of the S&P 500 prior to March 4, 1957 is backtested. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back-tested returns. Past performance is no guarantee of future results.
Investors should take a great deal of encouragement from this statistical look at bear markets and recoveries. The simple fact is that recoveries have been much more potent than downturns through history. Furthermore, this selloff is already fairly mature.
The median gain during a recovery—at 77.5%—compares favorably to the median loss of 33.5%. A hypothetical investor undergoing a 33.5% decline followed by a 77.5% gain would be well ahead for the full period.
Same goes for duration: the median recovery period is 633 days versus a median bear market length of 240 days. Here, the largest and longest recoveries are for the same period: late 1987 through early 2000.
Investor hands are not tied, but they should sit on them.
Of course, we’d prefer a small bear over a big bear, but investors have no control over this outcome. So what can we control?
Investors have the last word on how much of a downturn they’re willing to tolerate. We recognize that the market environment has ranged from inhospitable to hostile in 2022. The simultaneous selloff in bonds has added an uncommon challenge into the mix.
As losses grow, it can be tempting to consider a temporary exit in favor of cash. But when would be the right time to re-invest? And while cash is always susceptible to inflationary erosion, price increases are currently running at a 40-year high.
We urge investors to consider the wisdom of shouldering the first 20% of a downturn only to exit. Bearing the pain of the decline is an investment in the eventual recovery. History suggests the recovery will eclipse the selloff. Exiting for cash is akin to relinquishing this investment.
As active investment managers and asset allocators we view these types of environments in terms of the opportunities they offer. A globally diversified investment portfolio will not have endured the full brunt of the selloff in U.S. stocks, which have been hit harder than many other asset classes.
Opportunities are beginning to appear, as higher interest rates have pommeled bonds and expensive stocks.
High-priced U.S. stocks have been leading this decline on the way down. The NASDAQ Composite Index, which contains many of the expensive growth and tech-oriented stocks that have been under the most recent pressure, peaked in November and has declined by more than 30% through May. These types of stocks are moving back toward valuation levels that are more in line with the rest of the market. Value-oriented equities still look attractive, and we expect to see bargains in equities if the market falls a bit further.
We remain nimble in fixed income, as always, adding credit or duration exposure as spreads widen and removing risk once spreads tighten. Higher volatility creates more opportunities to manage these exposures.
Less-efficient areas like emerging markets offer significant opportunities for active managers. Emerging-market equities have been in a bear market for several months, while emerging-market debt yields have been driving higher. The diverse opportunity set in emerging markets tends to reveal itself during downturns, providing the opportunity to identify attractive risk-and-return tradeoffs
This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice and is intended for educational purposes only.
There are risks involved with investing, including possible loss of principal. Diversification may not protect against market risk.
Information provided by SEI Investments Management Corporation, a wholly owned subsidiary of SEI Investments Company.