Investors are growing increasingly nervous as several bear market indicators flash red. The Buffett Indicator, named after Berkshire Hathaway legendary investor Warren Buffett, suggests that the U.S. stock market is historically overvalued.
Investor sentiment is also weakening. The American Association of Individual Investors reports that 44.4% of individual investors expect a bear market within the next six months, compared with 32.9% who anticipate a bull market. The share predicting a bear market rose by 4.5 percentage points in just one week.
Still, even if a bear market arrives soon, history offers an important reason for long-term investors to remain focused. There is no way to know exactly when the next bear market will begin, but every bear market in U.S. history has shared a significant trait.
Bear markets are shorter than bull markets
A bear market is generally defined as a decline of more than 20% in a broad market index such as the S&P 500, the benchmark most commonly used to gauge the health of the U.S. stock market.
Even the most severe and longest bear markets in U.S. history have been followed by bull markets that lasted longer—often much longer. The steepest decline was the 56.8% drop during the Great Recession, while the longest was the 31-month bear market that followed the bursting of the dot-com bubble.
The bear market following the dot-com crash lasted 31 months from peak to trough, running from March 2000 through September 2002. It was followed by a 60-month, or five-year, bull market that continued until October 2007.
The Great Recession then brought a 17-month bear market that lasted until March 2009. That downturn was followed by the longest bull market in history, which continued for nearly 11 years before the one-month COVID-19 bear market in February 2020.
Since the S&P 500 was created in 1957, the stock market has spent most of its time in a bull market. There have been approximately 12 total years of bear markets, compared with about 57 years of rising markets.
Bull market gains have historically exceeded bear market losses
By definition, each bull market since the S&P 500 was created has produced a gain greater than the loss recorded during the preceding bear market.
For investors, the more encouraging pattern is that bull markets have typically returned at least twice as much as the preceding bear market lost. Of the 13 bull markets since the S&P 500’s creation, only one—the 1966-1968 bull market—returned less than 1.9 times the losses from the preceding bear market.
In some periods, the difference was substantially larger. The 1982-1987 bull market returned nine times the losses from the preceding 1980-1982 bear market. The 1990-2000 bull market returned 21 times the losses from the 1990 bear market.
History therefore suggests that any future bear market is likely to be relatively short-lived compared with the bull market that follows. Investors who remained invested in the S&P 500 through previous bear markets eventually recovered their losses and generally achieved substantial gains after the downturn ended.
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John Bromels has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool has a disclosure policy.
History Says All Bear Markets Have 1 Trait in Common — and It’s Fantastic News for Investors was originally published by The Motley Fool
Source: finance.yahoo.com
