How Long Might The Bear Market Last?

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The S&P 500 is now officially in a bear market, defined as a decline of 20% from its recent peak, there are three ways we can assess how long a bear market can last and How serious can a fall be for stocks?

Of course, all outlooks here are conjectures, but they do provide some indication of what could be in store for investors. These techniques include historical comparison, valuation, and economic analysis.

historical analysis

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Most simply looking at history shows that we have already entered a bear market. An Analysis by the First Trust of Bear Markets Since 1942 finds that the average fall in a bear market is -32%, which would correspond to a fall of about 3,300 or about -12% from current levels in the S&P&500 and a bear market lasting about a year. This would suggest that the bear market will end around December 2022. Of course, bearing in mind that we are already in a bear market.

Also, if you look at a different index like the tech-heavy Nasdaq, the bear market started earlier and fell further, so the bear market may be nearing an end.

On the other hand, there were some bad bear markets before Otherworld worked, so including those in the analysis adds about 6 more months to the average bear market and increases the average downtrend.

Either way if history is any guide, we may be almost halfway into a bear market in a matter of time and more than halfway through a downtrend in a stock. Based on history, we’ve already seen the worst of a bear market, as many bear markets have never seen anything worse than a 20% drop in stocks.

So while history cannot provide complete comfort and shows examples of bad bear markets with declines near 50% and bear markets lasting around 2 years in most cases history is starting to suggest that things are starting to move from here. could be better. Most of the damage may have already been done.

an appraisal approach

Looking at valuations can provide some indication of when stock returns may start to improve. However, this assessment is more helpful from a medium-term perspective of around 7-10 years. So this helps us assess when the prospect of positive stock returns improves, not necessarily when the bear market will end. For example, the S&P 500’s PE ratio is currently approximately 19x, which means the market is currently paying $19 for every dollar earned from the S&P 500. This is a much lower high than previously thought, and less than a much higher valuation in recent decades. However, it is still above the average long-term valuation level, which is around 15x. This suggests that stocks may decline further by 20% or so to reach the average valuation level. However, this is a long-term indicator. This suggests stock returns may soften slightly in the coming years, as we’ve seen in recent history, but valuations are nonetheless becoming slightly more attractive than they are. Although valuations do not provide a firm floor for stock prices, valuations are much more attractive than they are.

an economic assessment

One final way to think about a bear market is from an economic perspective. Three main variables matter here, although all are related. Bear markets will ease when markets can go through a recession, see if the Fed begins to reduce rate hikes or expects inflation to moderate. It’s important to note here that the market is fairly forward-looking, the stock market often drops well before the economy, and a lot of Fed hikes cost money.

A lot of the data here is actually quite optimistic, although it is clearly convoluted. First, the economy is doing remarkably well on a number of metrics, such as jobs, although perhaps starting to soften. This suggests that any downturn could be quite mild.

Of course, inflation is a major concern, but, even here, there is some suggestion that we may have already seen peak core inflation in 2022, especially as energy prices currently appear to be falling, even though inflation is well above policymakers. made of. target.

The market is pricing in a much higher future hike by the Fed, and it is possible to change course to a less aggressive approach. For example, one policy maker called for a small increase at the last Fed meeting.

Lastly, if there is a recession in 2023, it means the market could overtake it at some point in 2022. As such, given the price of so much economic bad news already by the market, the economy may actually be doing a little better. The market is hopeful and this could set a floor on the bear market.

Of course, it all hangs on future economic data and Fed announcements, but if the incremental news starts to improve from here, it’s likely that the markets will do the same. This is not to offer an economic crystal ball, except that the current outlook is decidedly negative and things could get better.

So looking at a range of factors, this bear market offers moderate level of comfort. The stock could fall further from here, but it is possible that we have already seen the worst of this bear market in terms of price drops.

Valuation levels suggest that returns from this point in the next decade may still not be as good as those seen for stocks in recent years, but it can still make stocks an attractive asset class, relatively. Speaking, as has been the case for most of history for those with a long-term investment horizon.

Of course, a lot depends on the economy, but a lot of bad news may already be in the price and even if a recession does occur, it may be relatively mild. Finally, remember that market timing is tough. Stocks have shown strong returns throughout history, and investors who change course because of a bear market often underperform, missing out on future returns.

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