We all always look forward to the end of something unpleasant or dull. The bear market of 2022 is no different. Many investors are looking forward to its end when they can finally make some money again.
But what is a bear market? Is it only a loss? Let's look at Bear markets through history and see what we can learn from them.
What is Bear Market? Definition.
A bear market may be caused by various factors, such as an economic recession, high inflation, interest rates, or political turmoil. Strong bull markets have preceded many bear markets, as investors become complacent and prices become overextended.
While a bear market can be difficult for investors, it can also present opportunities to buy lower-priced assets. For example, bear markets often offer attractive entry points for long-term investors willing to stomach market volatility.
Bear Markets. History.
The first thing that we all have to remember is that bear markets are normal. Since 1928 it has happened 26 times. But on the contrary, there have also been 27 bull markets. So, it is not something that we should be too worried about. The average bear market has lasted for 13 months and has seen a decline of 36%.
Let's check some of the most interesting crushes.
The bear market of 1929 is one of the most well-known bear markets. It began in September 1929, with the stock market crash, and lasted for more than two years. During this time, the stock market lost 73% of its value. The bear market was a major factor in the Great Depression, one of the worst economic downturns in history. And it took almost two decades for the stock market to recover from the crash. There is a fascinating book about an eyewitness of those events, one of the most famous traders in history - Jesse Livermore. It is called "Reminiscences of a Stock Operator: With New Commentary and Insights on the Life and Times of Jesse Livermore".
The bear market of 1973-74 was caused by several factors, including the oil crisis, high inflation, and interest rates. The stock market lost 48.20% of its value during this time.
But since the 1950s, the longest bear market was in the early 2000s when the dot.com bubble burst. At that time, the Nasdaq Composite stock market index rose 400% between 1995 and its peak in March 2000. But by October 2002, after losing 78%, it gave up all those gains during the bubble when many online shopping companies failed, including Pets.com and Boo.com.
The dot-com crash caused devastating effects on various industries. Such communication services like Global Crossings or North Point Communications shut down entirely. Still, some survived, notably Cisco Systems, whose fortunes reversed and are now worth almost $207.108 billion.
The global financial crisis caused the bear market of 2007-2009. It was the worst bear market since the Great Depression, with the stock market losing 51.93% of its value.
So, as we can see, there are some interesting patterns that we should be aware of.
How long does it last?
If to calculate the average duration, let's look at the history again. During 26 bear markets, the average length is 289 days or 9.6 months. That's significantly shorter than the average length of a bull market, which is 991 days or 2.7 years.
The shortest bear markets lasted less than two months. The longest bear markets lasted more than three years.
The bear market of 2020 began on February 19 and ended on March 23, lasting just 34 days. This was the shortest bear market in history. The bear market of 2020 was caused by the COVID-19 pandemic, which led to a global economic shutdown. The stock market lost 33.92% of its value during this time.
So, what can we expect from the bear market of 2022?
Unfortunately, predicting bear markets is difficult, as many factors can cause them. The recent S&P 500 sell-off is a result of two related factors. Firstly, inflation has been getting out of control as the coronavirus disease and supply chain issues are caused by the same reason. Secondly but certainly not least importantly - Russia's invasion of Ukraine, which partly was a reason for high fuel prices.
And of course, we can not forget that interest rates are also rising as the Federal Reserve attempts to keep inflation under control.
No analyst can name specific dates, but some financier comments are already appearing in the media that the current bear market will not last long.
For instance, Bank of America Research analysts wrote at the beginning of May 2022: "If history were to repeat, then today's bear market ends in October 2022".
We have no choice but to observe and build a trading strategy.
Can the bear market be profitable?
The bear market is not only a time of high risks but also great opportunities.
First of all, it's worth noting that short-selling has become more profitable. Secondly, you can buy assets at a discount and build your long-term investment strategy.
Bear markets are difficult to predict, so it's essential to be careful when investing during this time.
It is advisable to invest in companies with solid balance sheets and a history of weathering bear markets well. These companies are typically large, blue-chip stocks with global businesses.
These companies have a history of paying dividends, which can provide some income during a bear market. They also tend to be less volatile than the overall market and are more likely to hold their value during a bear market.
Any bear market is a natural part of the stock market cycle. They are difficult to predict, but there are some patterns that we can observe. What should you remember:
- Bear markets are normal.
- Bear markets are shorter than bull ones.
- Since 1945, there have been 14 bear markets (it is happening approximately every 5.4 years). But before 1945, this period was only 1.4 years.
- A bear market doesn't necessarily indicate an economic recession.
- Yes, it is painful. However, during the last 90 years, stocks have been on the rise by 78%.
So, the bear markets of 2022 might be an excellent opportunity to buy dips. But remember always to be careful when investing during this time. It's important to invest in companies with strong balance sheets and a history of weathering bear markets well.
Subscribe to our YouTube channel, where we publish technical analyses of various stocks every day. Every Monday, our co-founder - Jim Stromberg, whose trading experience is 26 years, analyzes large companies and market trends.