If a Bear Market Is Coming, History Has Good News for Investors

There have been 12 official bull markets since the end of World War II, with an average length of five and a half years. The current bull market, which started on Oct. 12, 2022, is nearly four years old. The S&P 500 (^GSPC -0.25%) has delivered a total return of 128% during that bull run, but it looks historically expensive at 30 times its trailing 12-month earnings.

Therefore, it’s only a matter of time before the next bear market begins. More than a dozen bear markets have occurred over the past eight decades, with an average peak-to-trough decline of 32%. But here’s the good news: bear markets tend to be much shorter than bull markets.

Image source: Getty Images.

Why are bear markets shorter than bull markets?

Since the end of World War II, the average bear market has only lasted for 1.2 years. That means the stock market spends about 78% of its time expanding rather than contracting. Bear markets are much shorter than bull markets for three reasons.

First, the selling cycle is driven by panic, and stocks drop much faster than they rise. That fear spreads rapidly and drives more investors to liquidate their positions. Those liquidations can cascade as margin calls, stop-loss orders, and other cutoffs are triggered. Highly leveraged investors will be forced to sell their positions immediately.

Second, severe market crashes can drive the government to respond with monetary easing, interest rate cuts, liquidity injections, and stimulus packages. Those measures can stop the bleeding and draw more investors back to the market.

Lastly, America’s stock market is a mirror of its growing economy. As long as America’s top companies continue to expand — supported by population growth, innovation, and improved productivity — its top stocks will rise over the long term.

Why is that good news for investors?

When the next bear market happens, it will be tempting to liquidate your stocks and park your cash in CDs, T-bills, or other low-risk, high-yielding investments. But by doing so, you’ll miss out on some massive long-term gains. A $1,000 investment in the S&P 500 on the first day of 2006, with reinvested dividends, would be worth about $6,200 today — even after weathering the Great Recession, the COVID-19 crash, and the rate hike shocks of 2022 and 2023. That same investment in a 20-Year Treasury, with reinvested yields, would only have grown to $1,500.

Therefore, the lesson is simple. Bear markets are shorter than bull markets, and they’re usually a great time to buy more stocks rather than blindly sell them. As Warren Buffett famously told investors, you should only be “greedy when others are fearful.”