Investors are getting nervous, and it’s easy to see why.
A number of bear market indicators are flashing red right now. According to the Buffett Indicator, named for legendary investor Warren Buffett of Berkshire Hathaway, the market is historically overvalued.
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Meanwhile, the American Association of Individual Investors reports that 44.4% of individual investors are expecting a bear market in the next six months, far more than the 32.9% predicting a bull market. That’s a 4.5 percentage point jump in the bear-predicting cohort in the past week alone.
But even if a bear market arrives tomorrow — and, remember, there’s no way to know exactly when a bear market’s coming — history has some good news for investors.
Every bear market in U.S. history has had one trait in common. Here’s what it is and how you can use it to your advantage.
Bear markets are shorter than bull markets
A bear market is defined as a drop of more than 20% in a broad-market index such as the S&P 500, which is the one that’s most commonly used to gauge the health of the U.S. market. But even the worst bear markets in U.S. history — from the steepest (the Great Recession’s 56.8% decline) to the longest (the 31-month bear that followed the bursting of the dot-com bubble) — have been followed by an even longer bull market. And it’s often a much, much longer one.
The record-long bear market that followed the dot-com crash, for example, lasted (from peak to trough) 31 months from March 2000 through September 2002. But it was followed by a 60-month (5-year) bull market that lasted until October 2007.
Then we had the Great Recession’s 17-month bear market, which lasted until March 2009. That was followed by the longest bull market in history, which lasted almost 11 years until the one-month COVID-19 bear market of February 2020.
In other words, since the S&P 500 was created in 1957, the stock market has been in a bull market most of the time. We’ve only had about 12 total years of bear markets compared to about 57 total years of bullish reign.
Bull market gains crush bear market losses
By definition, every one of those bull markets has returned more than the preceding bear market lost.
The great news for investors is that bull markets usually return at least double what the preceding bear market lost. Of the 13 bull markets since the S&P 500 was created, only one (1966-1968) has returned less than 1.9x the preceding bear market’s losses.