Bear market basics

by Fidelity Viewpoints

Looking at history can help you become "bear aware."

Key takeaways

• A bear market is commonly defined as a decline of at least 20% from the market's high point to its low.
• Bear markets are a normal part of stock investing.
• Bear markets have historically varied in length but stock markets have always recovered from them.
• The current market downturn may be a bear correction within a long running secular bull market.
• The end of the current market downturn will likely be affected by how the Federal Reserve manages inflation and by how China’s zero-COVID policy and the war in Ukraine may affect the US economy.

The S&P 500 entered a bear market on June 13, as worries about the impact of higher interest rates, inflation, slowing economic growth, and geopolitical risks prompted investors to sell stocks and bonds and seek shelter in cash. A bear market is commonly defined as a decline of at least 20% from the market's high point to its low during a selloff and the drop from a near-record high on January 1 to bear country has been steep and deep. That drop, though, doesn’t change the fact that bear markets are a normal part of stock investing and have historically appeared every 6 years on average.

Bear markets—like bull markets—can be either cyclical or secular and it’s unclear which species of bear has arrived this time. Cyclical bear markets arise when investor sentiment turns negative and typically last weeks or months. Secular markets are those driven by long-term trends such as the direction of interest rates or corporate earnings, rather than by the phases of the business cycle, and they may continue for many years despite even severe short-term interruptions. Secular bulls are characterized by prices rising over the long term despite occasional corrections and short-lived bear markets. Secular bear markets are the opposite—long-term price declines punctuated by occasional market rallies.

Jurrien Timmer, director of global macro in Fidelity's Global Asset Allocation Division, says the current bearish decline does not necessarily represent the end of what may be a long-running secular bull market that began in March 2009. During that time, stocks fell into cyclical bear market territory 4 times, most recently in March 2020. He also points out that the secular bull market which ran from 1982 to 2000 was interrupted by a market downturn in 1987 which took the S&P 500 33% lower. "I remember clearly that many people were bracing for a depression, which of course never happened," he says. "A year or two later the market was making new highs, and this continued for another decade or so until the peak in 2000."

Corrections versus bears

In short-term corrections where stocks drop by as much as 10%, buyers tend to quickly appear to take advantage of lower prices because they expect stocks to rise again soon. But bear markets are characterized by a shift in investors’ expectations from confidence that the economy will grow and stocks will rise to skepticism about growth and doubts about the direction in which markets may move.

Uncertainty about whether stock prices will rise or fall can make investors more likely to sell stocks than buy. That sentiment may cause prices to continue to decline and lead to a prolonged period of low returns on the stock allocations in investors’ portfolios. Bear markets also pose risks for those who unwisely attempt to "time the market" by selling stocks when prices are falling or buying them at what they often wrongly believe is a market bottom.

What history tells us about bears

While bear markets are historically shorter-lived than bull markets, both are regular parts of investing. The S&P 500 has endured 17 bear markets since 1926. History shows that bears appear with steep drops in stock prices, but their behavior after their arrival varies in terms of how long they stay. Some bear markets have lasted for years. Others, like the one in 2020, lasted a few months. Most have been accompanied by economic recessions, but not all.

Tracking the bears

Source: Fidelity Investments. Past performance is no guarantee of future results. The S&P 500® Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation. S&P and S&P 500 are registered service marks of Standard & Poor's Financial Services LLC. The CBOE Dow Jones Volatility Index is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. You cannot invest directly in an index.

What might chase the bear away—or feed it?

Financial markets move up and down based on a variety of factors. These include investors’ expectations about how much money companies may earn or how quickly or slowly the economy may grow. As companies report second quarter earnings, the results will likely play a significant role in attracting or chasing away bears. This bear market, though, is being fed by a variety of sources, and the speed and time at which the bear departs will likely depend on how effective policymakers are in managing inflation and geopolitical risks. ”Inflation and what the Fed does about interest rates, the Ukraine conflict, and China’s COVID policies will have the most material impact on investing in the second half of the year,” says veteran Fidelity portfolio manager Ford O’Neil. So far, the Federal Reserve has responded by raising interest rates, which has helped push markets lower, accompanied by anxiety-producing headlines.

The psychological effect of those headlines may also help feed bears. Anxious, inexperienced investors may feel a strong urge to sell assets when they hear the term "bear market." If panic-driven selling becomes widespread, markets can become more volatile and take longer to recover than fundamental factors suggest they otherwise would.

What should you do about the bear?

While it is impossible to know which direction the market will move in the near term, selling assets into a bear market is almost never a good idea. Talking to your advisor can help ensure that your current asset allocation is appropriate to meet your long-term objectives regardless of the present market environment. While the decline in stock prices may require you to rebalance your portfolio, if you have a well-diversified mix of assets such as stocks, bonds, and cash that is consistent with your investment time frame, financial situation, and risk tolerance, bear markets should not be a reason for you to deviate from your financial plan.

Like a hiker passing through the Rockies, becoming "bear aware" can help increase your peace of mind despite the risks that may exist.

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