2022 has seen the worst start to a year for the U.S. stock market in 50 years, but investors seem more nonchalant than in past near-bear markets, writes Nir Kaissar in a piece for Bloomberg Opinion. A bear market is defined by a drop of 20% or more from its most recent high—territory that the market dipped into briefly on May 20th. Still, that hasn’t been enough of a reason for investors to panic. Perhaps investors have become used to extreme market volatility, because in the past the markets have always recovered.
But a different, more disturbing, reason could be behind investors’ seeming indifference: they’ve come to believe that all sell-offs will be short-lived, because in the past 10 years that’s been the case. The near-bear market in 2011 when the S&P 500 dropped 19.4% only lasted 5 months, and a decline of 19.8% in 2018 lasted just 3 months. And the bear market at the start of the pandemic in 2020 ran just 33 days. No one seems to remember the bear market of the dot-com bust that dragged on for 2 1/2 years, or the 18 months it took for the market to climb out of the 2008 financial crisis.
But bear markets that stretch on for longer don’t necessarily mean steeper declines. The S&P 500 took almost 2 years to fall 27% from 1980-82, but it plummeted 34% over those 33 days in 2020. And the length of a bear market matters, the article contends: in a short bear market, investors will barely register a blip before seeing the market climb back up, but in a long bear market, many investors will bail out of the market altogether—especially younger investors who have not experienced a lengthy bear market and may not have the stomach for it.
Take, for example, the dot-com bust in 2000, what Kaissar calls “a crash in three acts.” The market hit its high in March 2020, and then tech stocks began to crash—much like now. The Nasdaq Composite Index fell 15% in 6 months while the rest of the market flatlined. Then in September 2000, the S&P 500 began dropping—27% in 6 months as the Nasdaq plunged another 61%. The market looked to be on an upswing in April 2001, only to see the S&P 500 drop 26% more and the Nasdaq 38% over the next 4 months. By fall 2001, the economy was in a recession. It seemed to have already hit bottom—until March 2002 when everything began to tumble even more. By October 2002, the S&P 500 had been cut in half from 1527 to 777, and the Nasdaq had seen almost 80% of its value evaporate.
Just before the 2000 crash, stocks were overvalued, trading at 28 times forward earnings. That made them vulnerable in much the same way they are now, when they were trading at 27 times forward earnings at the end of 2020. During the dot-com bust 20 years ago, the S&P 500 bottomed at 16 times; during the 2008 financial crisis, it bottomed at 11 times. So as cavalier as investors may be right now, the market still has plenty of room to fall. Hearty investors will cling on with the hope that the market has to eventually go back up but, Kaissar writes, “the longer this downturn drags on, the harder it will be.”