Within the normal fluctuations of financial markets, bear markets are characterized by widespread pessimism and stock price falls. While bull markets typically persist for a few years on average, bear markets act as periodic yet inevitable market corrections that reset inflated valuations and sentiment. For investors, understanding how regularly they occur historically provides context for managing volatility risks long-term. This article analyzes statistical data on bear market frequency over several decades and economic cycles to draw insights into their typical longevity and severity.
Bear Market Frequency Since 1950
Looking at major US stock market indexes like the S&P 500 serves as a reasonable benchmark to evaluate bear market periodicity through history. Since 1950, there have been 14 distinct bear markets according to conventional definitions of price drops exceeding 20% from recent highs. This averages out to a new bear market commencing every 4-5 years on average when viewed over the entire post-World War 2 period.
Notable bear markets during this timeframe included the 1953-54 decline associated with market uncertainty and recession, as well as two severe bear cycles in the early 1960s. The 1973-74 bear was spurred by an oil crisis while the 1981-82 market saw plummeting confidence amidst high inflation and interest rates. The 2000-2002 bear was technology-fueled, and the Global Financial Crisis triggered an extended 2007-2009 bear market.
However, taking a longer view incorporating over a century of data paints a more nuanced picture of their historical regularity. While averages help conceptualize bear market frequency, the reality shows their timing can fluctuate markedly in practice. The following period analyses shed further light.
Bear Market Cycles: 1917-1949
Examining the 32 years before the post-war era also reveals fluctuations in bear market periodicity. A severe 1917-1921 bear market followed World War 1 uncertainties and the Spanish Flu pandemic. The 1929 crash marked the start of a prolonged 13-year Great Depression-era bear cycle lasting until 1949 as the war-torn economy found footing.
Strikingly, this single multi-year downturn created an anomalously long gap between the previous bear’s end in 1921 to the next commencement in 1937, distorting short-term averages. Long-term perspectives help maintain logical expectations beyond statistical outliers.
Bear Market Cycles: 1850-1916
Stepping further back, the period between the mid-19th century and World War 1 also witnessed fluctuations. Between 1850-1870, no outright bear markets occurred as industrialization drove growth during Reconstruction.
The Panic of 1873 then ushered in a bear lasting 6 years until 1879 as railroad overbuilding collapsed. A shorter 1883-1887 bear followed that rebounded swiftly. However, an acute 1893-1897 depression bear dragged on for years due to currency and agricultural crises that diminished investor wealth severely.
Key Takeaway: While post-1950 data hints at a neat 4-5 year average between bear markets, wider historic windows show cycles can vary significantly in both duration and depth depending on extenuating economic conditions. Averages alone fail to capture this episodic unpredictability.
Post-1950 Bear Market Lengths Â
Beyond simple frequency, it’s also instructive to examine how long bear markets have typically lasted based on data since 1950:
- 1953-1954 Bear: 8 months
- 1956-1957 Bear: 8 months
- 1960-1962 Bear: 26 months
- 1966-1982 Bear: 16 months
- 1973-1974 Bear: 16 months Â
- 1981-1982 Bear: 21 months
- 2000-2002 Bear: 33 months
- 2007-2009 Bear: 17 months
- 2020 Bear: 33 months
Key Takeaway: Bear market durations historically ranged considerably from short 8-month declines to multi-year drawn-out crashes over 2 years. The 2000-2002 and 2020 bears illustrate how severe macro bear markets can persist substantially longer than frequency averages might suggest.
Post-1950 Bear Markets Depth
Just as their lengths varied, the magnitude of price drops during these historical bear cycles also differed significantly:
- 1953-1954 Bear: -26%
- 1956-1957 Bear: -22%
- 1960-1962 Bear: -28%
- 1966-1982 Bear: -26%Â Â
- 1973-1974 Bear: -48%
- 1981-1982 Bear: -27%
- 2000-2002 Bear: -49%
- 2007-2009 Bear: -56%
- 2020 Bear: -34%
Key Takeaway: While a -20% drop conventionally defines a bear market, history shows declines can also exceed -25% in mild cases or plunge over -40% during severe economic downturn bear markets. Their depths tend to correlate strongly with macroeconomic conditions at each inflection point.
Post-WW2 Economic Cycles and Bear Markets
Beyond statistics alone, appreciating links between bear market occurrences and larger economic cycles provides indispensable context:
- Early 1950s Bear: Short recession-induced correction. Â
- Late 1950s Bear: Short shakeout amid economic uncertainties.
- Early 1960s Double-Bear: Lingered through the recession and weak recovery.
- Mid-1960s Bear: Brief recession-triggered.
- Early 1970s Bear: Accelerated by the 1973 oil crisis recession. Â
- Early 1980s Bear: Prolonged by a severe double-dip recession.
- Early 2000s Bear: Coincided with recession amid tech/housing bubbles. Â
- 2007-2009 Bear: Precipitated by Global Financial Crisis recession.
- 2020 Bear: Pandemic-triggered yet resilient bull market ensued.
Key Takeaway: Nearly all postwar bear markets either directly preceded or coincided with economic recessions, demonstrating their cyclical relationship. Avoiding recession also appears to curb bear market risks, though geopolitical shocks like the pandemic break this pattern. Knowledge of intertwined macro cycles aids bear market expectations.
Current Market Conditions and Bear Risks
As of 2022, the ongoing bull run that took root in March 2009 has persisted over 13 years, creating the longest in history. While such extended intervals naturally elevate future bear market probabilities, prudent risk management requires avoiding fixation on uncertain macro timing:
- Low unemployment and solid GDP growth remain supportive fundamentals. Â
- Inflation and interest rate hikes could potentially chill the recovery.
- Geopolitical tensions along with supply chain issues pose economic risks.
- Still-elevated asset valuations leave room for profit-taking declines.
- Sentiment surveys show complacency after years of gains to date.
Key Takeaway: No foolproof indicators confirm tops or bottoms, yet uneven macroeconomic conditions and euphoric sentiment show heightened, though not certain, bearish risks in the years ahead based on historical patterns. Prudent risk positioning focuses on fundamentals over market predictions.
Mitigating Bear Markets Damage
Though inevitable over the long run, properly diversifying portfolios according to time horizons helps quell bear market volatility while ridding euphoric risk:
- Maintain balanced asset allocation suitable for goals/risk tolerance. Â
- Favor dividend growth stocks and bonds for stability.
- Consider sector/factor tilts favoring defensive areas.
- Utilize bear market ETFs/mutual funds providing downside protection.
- Overweight international equity/bond exposure for diversification. Â
- Maintain sufficient cash reserves for bear market buying opportunities. Â
disciplined methodology fosters composure weathering inevitable cyclical corrections that subsequently generate long-term real returns compounding wealth creation despite episodic turbulence. Prudent management accentuates sustainable gains while minimizing behavioral mistakes.
Conclusion
Bear markets have historically been a driving force in market cycles. While traditional definitions suggest a fresh recurrence every few years after 1950, their precise timing, depth, and longevity reveal considerable changes that correspond to wider macroeconomic settings and circumstances existing at critical turning moments.
Appreciating the connections between the periodic natural resetting of inflated values and later recoveries indicates that they play a logical function in the market. Which is eventually overcome through patience and good risk management tailored to each climate. Overall, keeping a balanced, fact-based view on bear markets’ irregular but necessary role within strong financial institutions fosters resilience throughout unavoidable volatility periods.
