In 2022, stock investors suffered their worst start to a year since 1970, with the S&P 500 falling 21% during the first half of 2022. The widely tracked stock market index fell into bear market territory on June 13 after closing more than 20% below its high reached in early January.
The market has since recovered slightly, but for investors, there’s been no shortage of things to worry about. Rising interest rates, high inflation, the war in Ukraine and a possible recession are just some of the risk factors that markets have focused on this year.
After the tumble into bear market territory, stock investors are trying to gauge how much lower prices may fall or if the worst is behind them. While no one can answer those questions definitively, looking at past bear markets may offer clues about how this one may unfold.
Lessons from every bear market since 1929
Looking at data from the past century may provide hints about what to expect going forward.
The average bear market since 1929 has resulted in a roughly 37% decline in the S&P 500 and it has taken an average of 344 days for the market to reach its bear market bottom.
If these averages were to play out in this bear market, investors could expect the S&P 500 to fall to about 3,017, or a roughly 22% decline from mid-July levels. The average duration from peak to trough would mean the market could bottom in mid-December 2022, based on its peak of Jan. 3, 2022.
But it can be difficult to draw precise conclusions from history. What seem like obvious problems today may not be what matters most six months or a year from now.
In early 2000, investors were dealing with the final days of the tech bubble, but less than 18 months later, the 9/11 terrorist attacks helped send the economy into a recession and the country into war. That bear market sent the S&P 500 down almost 50% over two and a half years.
Other bear markets are shorter. In 2020, as the world was coming to grips with the onset of a global pandemic, stocks tumbled more than 33% in just over a month before recovering thanks to an unprecedented amount of federal stimulus spending to help keep the economy afloat.
What should investors do in this bear market?
While bear markets can be unnerving, investors should expect them. We are experiencing the 22nd bear market since 1929, so while they don’t happen frequently, they are a normal part of being a long-term investor. Here are a tips for how investors can handle the current bear market.
Avoid the urge to sell: When stocks are falling and your retirement account is losing value, it’s understandable to want to sell your investments to stop the pain of losing money. Cash feels like a good investment during market selloffs, but it is a lousy investment over the long term. If you have money invested in the stock market that you think you’ll need in the near future, then sell. But other than that, it’s best to stick it out.
Think of it as an opportunity: Bear markets are a great time to invest money into the market because prices have declined substantially. This can be psychologically difficult to do, but when people are hyper-focused on these risks, they sell stocks, which can create bargain investments for stable-minded investors.
Consider rebalancing your portfolio: If an asset’s weighting is more than 5% away from your desired allocation, consider placing trades to bring it back in line.
Bottom line: While bear markets can be fearful times for investors, they should be expected over the course of an investing life. Bear markets typically bottom within 12 months and that selling during a bear market is rarely a good approach. Try to think of a bear market as an opportunity to add to your portfolio at attractive prices and stick to your long-term investment plan.