Bear markets can induce panic-selling in investors who would do better to focus on their long-term goals, and financial advisors need to foster constructive conversations with their clients to see them through these rough times, contends a piece in ThinkAdvisor. It can also be a good chance to pick up new clients by timely, insider information that can help newer investors contextualize the current environment.
A bear market is generally defined by an index dropping at least 20% from their most recent high—a mark that the S&P 500 hit in mid-June. There are have been 26 bear markets in the U.S. since 1929, all of which have been followed by bull markets—an important point that advisors need to drive home to their clients, in order to take advantage of lower prices now that could bring high rewards later. Stock markets have typically been very good to investors who stick around through hard times; a dollar invested in 1870 would have grown more than $20,000 by 2022—a 6.8% annual return despite many market slumps over those years. In fact, many strategists encourage investors to buy more during a downturn, the article relates.
But it can be hard for investors to hang on when it’s nearly impossible to predict how long a bear market will last. According to ThinkAdvisor, the average bear market lasts almost 15 months, but bear markets that don’t precede a recession can be as short as 5-6 months. Bear markets with a recession, however, can last upwards of 18 months, such as the bear market that came with the 2008 financial crisis (17 months), or even as long as 30 months, such as the one that came after the dot-com crash in 2000. When there isn’t a recession, market returns have been 20.5% and 29% on average, 6 and 12 months following the bear market respectively, and took an average of 13.6 months to recover. When there is a recession, however, it took an average of 25.5 months for the market to climb back up from the bottom—but posted returns of 29.7% and 46.6% on average at the 6- and 12-month marks, respectively.
Factoring bear markets that had a recession and ones that didn’t together, ThinkAdvisor found that a bear market led a recession by 9.6 months, took 22.6 months to recover, and posted 27.4% returns 6 months and 42.2% after the bear period ended. While we can’t predict how long 2022’s bear market will last, looking back in history could provide advisors with context to guide their clients.