Bear markets are scary. They breed uncertainty and fear. However, while no two bear markets are exactly the same, market indicators and historical perspective can help investors recognize a bear market and invest accordingly.
A bear market is a market drop of -20% or more over an extended period of time. Thirteen S&P 500 bear markets have occurred since 1929. Although they’ve varied in depth and duration, the average bear market saw the S&P 500 decline -40% over 21 months. Of course, some bear markets have been much shorter: The 1987 bear only lasted three months. On the other hand, the 1937 bear market (during the tail end of the Great Depression) lasted over five years.
S&P 500 Bear Markets, 1929-2009
Peak |
Trough |
Duration (Months) |
Cumulative Returns |
09/06/1929 |
06/01/1932 |
33 |
-86% |
03/10/1937 |
04/28/1942 |
61 |
-60% |
05/29/1946 |
06/13/1949 |
36 |
-30% |
08/02/1956 |
10/22/1957 |
15 |
-22% |
12/12/1961 |
06/26/1962 |
6 |
-28% |
02/09/1966 |
10/07/1966 |
8 |
-22% |
11/29/1968 |
05/26/1970 |
18 |
-36% |
01/11/1973 |
10/03/1974 |
21 |
-48% |
11/28/1980 |
08/12/1982 |
20 |
-27% |
08/25/1987 |
12/04/1987 |
3 |
-34% |
07/16/1990 |
10/11/1990 |
3 |
-20% |
03/24/2000 |
10/09/2002 |
30 |
-49% |
10/09/2007 |
03/09/2009 |
17 |
-57% |
Bear Market Average |
21 |
-40% |
Source: FactSet, Global Financial Data, as of 03/19/2015. S&P 500 Price Index Level from 09/06/1929 - 03/31/2015. Returns are presented exclusive of dividends. For “Duration,” a month equals 30.5 days.
Just as it’s important to understand what a bear market is, it’s also important to know what a bear market isn’t. Investors often confuse corrections and bear markets. Corrections are sharp, short-duration market moves of -10% to -20% amid a larger bull market. They are typically based on psychological factors or false fears—not fundamentals—and tend to be fleeting. These market swings are common even in great bull market years, but many investors are still thrown off course by them. But it’s critical not to confuse a bear market and a correction. If the market is just going through a correction, we believe you’re better off riding through it. Corrections can start for any reason or no reason, and it’s impossible to accurately and consistently time them. This is because corrections lack the causes and features of a bear market.
Many folks also think a bear market is the same as an economic recession—which is typically defined as a decline in Gross Domestic Product (GDP) for two or more consecutive quarters. While a bear market can coincide with a recession, bear markets can also occur without a corresponding recession and vice versa. Recessions aren’t very useful for forecasting bear markets because the stock market typically leads the economy—in other words, stocks move first. Bear markets often start and end before recessions have run their course.
Economic Recessions and the S&P 500
It’s easy to pinpoint a bear market in hindsight. Identifying a market crash in advance is much more difficult. The key is having the perspective to watch for and identify the right components and the discipline to prevent your emotions from getting in the way.
What are some signs you can look for to suggest a bear market might be forming? Our research shows there are two ways bear markets start:
*Source: FactSet, as of 10/12/2015. World GDP from 12/31/2008 - 12/31/2009 per World Bank data.
With painstaking research and thorough analysis, impending bear markets can be identified and some of the bear market decline can be avoided. Keep in mind, though, no one has consistently and correctly called every bear market in advance.
Following are some useful indicators that can reflect negative fundamentals, euphoric investor sentiment and potential big negatives. But remember: No one indicator alone is perfectly predictive of bear markets.
Negative Fundamentals:
Indicator |
Description |
Weak Corporate Earnings |
Are market earnings degrading or falling for multiple successive quarters? |
Inverted Yield Curve |
Are overnight interest rates higher than long-term, 10-year bond rates? |
Faltering Revenue Growth |
Earnings can be affected by outside factors; sales, less so. |
High Inventories, Low Demand |
Are business inventories piling up, while consumers’ demand seems to be tailing off ? |
Trend, Not Data Point |
One data point isn’t sufficient evidence. The trend should recur for multiple readings and in multiple nations. |
Euphoric Investor Sentiment:
Indicator |
Description |
High LBO Activity |
Are businesses taking on debt to buy competitors (leveraged buyouts)? |
Overpriced IPOs |
Are extremely low-quality IPOs flying off the shelves at sky-high valuations? Are companies going public solely for the sake of going public? |
Rising Corporate Debt |
Are businesses taking on more debt, despite slowing or negative sales and earnings? |
Uniformly Bullish Media |
Is the media uniformly positive—and are those who were already positive now euphoric? |
“It’s Different This Time” |
Is there widespread discussion of how “It’s different this time”? |
Euphoria |
Is everyone talking about stocks? Watching CNBC instead of the World Series or the Super Bowl? Are investors flooding into equity mutual funds? Is your taxi driver giving you stock tips? |
A Wallop—Big Enough to Shave Several Trillion Dollars off Global GDP:
Indicator |
Description |
Escalating Tariffs / Trade Wars |
Are countries around the world constructing extreme barriers to trade? |
Monetary Policy Errors |
Has a major central bank made a severe policy error? |
Regulatory Changes |
Have there been massive changes in regulations or accounting rules that may adversely impact businesses? |
Major Geopolitical Conflict |
Is a major, global conflict likely to erupt? |
Other Unknown Negative |
Is there something else that can knock several trillion dollars off global GDP? |
So you think you’ve identified a bear market? First, don’t panic. It may be a natural reaction, but in investing, your emotions are your worst enemy. They can make you act irrationally and ultimately undermine your long-term investing efforts. Second, don’t make snap decisions. Always consider the possibility you’re wrong. An incorrect bear market call can be seriously detrimental to reaching your longer-term financial goals. Suppose you move your entire portfolio to cash in anticipation of a bear market and stocks suddenly surge +10%. You’ve just lost 10%—plus any transaction costs you’ve incurred! That’s opportunity cost. Be careful not to call a bear market too soon.
“Going defensive” means preparing your portfolio for a bear market environment—which often involves drastically reducing equity exposure. Exiting the market is among the biggest investment risks you can take on. And if you are wrong, you could not only lock in losses if markets have fallen, you could also miss the big market up days you may need to reach your long-term goals.
The goal of going defensive isn’t to be up big when stocks are down—that’s far too risky. Instead, you should strive to get cash- or bond-like returns in the low single digits. If the market is down double digits and you are up even a few percent, you have done fantastic. Even being down a few percent is very good if the market is down double digits. In constructing defensive portfolios, the aim is: minimal volatility, high liquidity, tax efficiency and capitalizing on sector-level trends.
That being said, the best way to position your portfolio for a bear market very much depends on the specific market environment. If you are late to identify a bear market and big drops have started, you’re likely better off staying invested and riding out the storm. That is not easy advice, but if you are a long-term investor, remember, stocks rise over the long-term, including bear markets—your portfolio can survive.
Every bear market is followed by a bull market. Waiting too long to re-enter the market after a crash can be dangerous—you might miss out on the next bull market’s initial upward thrust. Perfect market timing requires luck, not skill. Re-entering just before the bottom versus just after the bottom probably won’t materially impact your longer-term returns.
A Big Early Bounce—First 3 and 12 Months of a New Bull Market
Bull Market Start |
Bull Market End |
First 3 Months' Return |
First 12 Months' Return |
06/01/1932 |
03/10/1937 |
92.3% |
120.9% |
04/28/1942 |
05/29/1946 |
13.5% |
53.7% |
06/13/1949 |
08/02/1956 |
16.2% |
42.0% |
10/22/1957 |
12/12/1961 |
5.7% |
31.0% |
06/26/1962 |
02/09/1966 |
7.3% |
32.7% |
10/07/1966 |
11/29/1968 |
12.3% |
32.9% |
05/26/1970 |
01/11/1973 |
17.2% |
43.7% |
10/03/1974 |
11/28/1980 |
13.5% |
38.0% |
08/12/1982 |
08/25/1987 |
36.2% |
58.3% |
12/04/1987 |
07/16/1990 |
19.4% |
21.4% |
10/11/1990 |
03/24/2000 |
6.7% |
29.1% |
10/09/2002 |
10/09/2007 |
19.4% |
33.7% |
03/09/2009 |
??? |
39.3% |
68.6% |
Average |
23.0% |
46.6% |
Source: Global Financial Data, FactSet, as of 03/19/2015. S&P 500 Price Index Level from 09/06/1929 - 03/31/2015.
Most bear markets have lasted about a year to 18 months. Very few in modern history have lasted fully two years or longer. If you’re making a defensive move, you probably shouldn’t bet on a market crash lasting so long. The 2000 and 2008 bear markets were exceptionally long and deep. Don’t let recent history bias you—few bear markets have lasted over 18 months. If you remain bearish for much longer than that, you may increase the likelihood you’ll miss out on the rocket-like ride that is almost always the beginning of the next bull run. Missing that can be very costly.