History of Bear Markets

As we find ourselves in the midst of a brutal bear market in 2022, it may be a good exercise to study the past in order to be better educated on what the future might hold for markets. This article is about the history of bear markets on Wall Street. We know that all other bear markets have ended at some point. Bear markets are difficult times for investors and can be psychologically exhausting. It’s never easy to see the wealth you have tied up in investments continue to fall on a daily basis.

But you know what they say: the night is always darkest before dawn. Every bear market has had that point where it seems like stocks will all continue to fall for eternity. It is a hopeless feeling for investors to watch years of gains erased in the course of months or even weeks. If the months of falling prices have taken a toll on you as an investor, we’re here to let you know that there is always a light at the end of the tunnel. From the Great Depression to the Dotcom Bubble to the Global Financial Crisis to the COVID-19 Crash, we’ve seen some notable bear markets over the years, and each time, the market has come back.

While there is some talk that the "end game" might be near with the US dollar and fiat currency, there is always a light at the end of the tunnel. The best way to navigate these hard times is through education -- learning how to profit from downturns, sideways action, or upturns in the market. With that in mind, let's look at some of the historical precedents in bear markets.

5 Things you Should Know About Bear Markets

Is this your first time navigating a bear market? A bear market is worse than a standard pullback or correction in stock prices. The definition that is most widely accepted for a bear market is when major indices, like the S&P 500 or NASDAQ, fall by at least 20%, often over a short period of time. Most of us have a long list of questions when it comes to bear markets like, "When will it end?" How often do they happen? Can we trade in a bear market? Here are 5 things you should know about bear markets:

Bear Markets are Completely Normal

It doesn’t seem normal to see stock prices fall by so much so fast, but rest assured that bear markets are a completely normal part of the stock market. If it feels like we are in a bull market more often than a bear market, you’re also correct. Since 1928 (well before it had 500 different companies), the S&P 500 has seen 26 bear markets and 27 bull markets. On average, bull markets last much longer than bear markets. It’s why the S&P 500 has seen an average annual return of about 10.5% since 1957 when the index hit 500 stocks. So while it might seem unnatural for stocks to erase so much of their recent gains, in the long run, the market is headed on an upward trajectory.

You Can Still Trade and Invest in a Bear Market

Contrary to popular belief, bear markets are actually excellent for trading and investing. The narrative is that everyone’s funds are already tied up in losing investments, so there isn’t much opportunity to buy. However, if you keep some cash or dry powder on the sidelines knowing that a correction or bear market is always around the corner, then it’s an excellent time to add to positions or trade the short side.

Skilled traders can find a way to trade no matter what direction the markets are headed. In fact, most will tell you that the best time to trade is when there is a lot of volatility in the markets. So whether it is through short selling, buying put options, or holding inverse ETFs, there are plenty of ways to trade and invest in a bear market.

How Often Do Bear Markets Happen?

Historically, bear markets have taken place on average every 3.6 years. There are obvious exceptions to the rule, like the COVID-19 crash to the 2022 bear market, or the time between 1987 all the way until the Dotcom bubble in 2000. Investors should also take note that while bear markets take place every 3.6 years, this does not include the normal corrections that take place almost every year of 10% or more. This certainly proves that stocks don’t always go up!

Some of the Market’s Strongest Days Happen in a Bear Market

Have you ever heard of a bear market rally? What about a dead cat bounce? As difficult as a bear market is to navigate, one thing is for sure: some of the most bullish sessions take place when the markets are at their weakest points. Call it over-exhausted selling or call it buying the dip, either way, the markets are prone to seeing major surges for a single day or a few days at a time. Unfortunately, the rally doesn’t usually last long and in some cases, is an indicator that the markets are ready to make their next leg downwards.

A Bear Market Does Not Indicate a Recession

Although the two ideas are often linked to each other, a bear market does not need an economic recession to exist, and vice versa. Take the COVID-19 crash for example. The stock markets tumbled into a sudden bear market when the novel coronavirus officially became designated as a pandemic by the WHO. But the definition of a recession is two consecutive quarters of economic decline. In this case, the sudden crash brought on a bear market but the economy did not dip into a recession. In fact, since 1929 there have been a total of 26 bear markets but only 15 recessions over that same time period.

What Was the Longest Bear Market in History?

If you look this up, you’ll come across a couple of different answers. The obvious one is the Great Depression from 1929 to 1932. This was one of the darkest economic periods in American history, and a crash that saw the Dow Jones Industrial Average lose nearly 90% of its value over the three-year period. Some will argue that the Great Depression should not be considered one long bear market, and that it is several bear markets joined together.

Another bad bear market was the one that followed the Dotcom bubble burst in 2000. This was a prolonged bull market for tech companies from 1995 to March of 2000 when the NASDAQ gained a staggering 400%. When the bubble burst, it was anarchy. The NASDAQ erased all of those gains and fell by nearly 80% by October of 2002. This also included another crash in September of 2001 with the effects of the 9/11 terrorism attack.

What Years Were Bear Markets in the US Stock Market?

As mentioned, there have been 26 official bear markets since 1929, so on average once every 3.6 years or so. Here is a list of bear market years in the US stock market.

As you can see, the frequency of bear markets tapered off following the end of World War 2 in 1945. Still, a majority of investors have likely experienced at least a few of the past six bear markets starting in March of 2000 with the Dotcom Bubble.

Why Do Bear Markets Happen?

There’s a long list of reasons why bear markets can happen. When an asset class bubble pops like with Dotcom stocks, real estate, or even commodities like oil, it can send the equities market into freefall. A majority of factors that lead to a bear market are macroeconomic in nature -- things that affect the entire global economy and not just headwinds for individual companies. These can include familiar ones like global pandemics, war, or other geopolitical tensions. But it can also come as a result of general economic slowdown and sluggishness.

How Long Do Bear Markets Last?

On average, bear markets have only lasted for about 289 days or just over 9.5 months. In other words, bear markets usually never even last a full year. This is relatively short compared to the average bull market which has lasted for 991 days or just over 2.7 years. So while it is a painful time to be an investor, historically speaking the good times far outweigh the bad ones.

How Long Did the 2008 Bear Market Last?

The 2008 bear market was one of the worst global crashes in recent memory. Also called the subprime mortgage crisis or the global financial crisis, it was caused by the complete collapse of the housing market in the US. This was due to banks and other institutions handing out subprime mortgages. This was the housing crash that was famously shorted by investor Michael Burry, and the basis of the movie The Big Short. It also saw the collapse and subsequent bankruptcies of major investment firms like Lehman Brothers and Bear Stearns. In all, the markets fell by 52% and the bear market of 2008 lasted for a total of 408 days.

How Long Did the 2000 Bear Market Last?

One of the longest bear markets in recent memory, the 2000 crash was caused by the burst of the Dotcom tech stock bubble and was magnified by the terrorist attacks in September of 2001. After internet companies soared to unimaginable prices, even companies like Amazon and Cisco saw their stocks fall by more than 80% during the crash. This 546-day bear market is one of the longest in history, and was accompanied by an eight-month recession in the US economy. If you are old enough to have survived the Dotcom bubble crash, then you likely won’t be bothered by any bear markets again.

How to Profit During Bear Markets

Bear markets can be a trader's dream, especially if it is accompanied by volatility. For traders, using bearish trades like short selling or buying put options can provide you with profits during the decline of the markets. Identifying bearish trends that repeat themselves can be a profitable way to play both sides of a trade.

For example, a bear flag usually occurs multiple times during a bear market, and being able to predict these can lead to locking in profits as the stock makes another drop lower. For long-term investors, the bear market is one of the best times to add to your portfolio at lower prices or through dollar cost averaging. Hedging your portfolio with inverse ETFs or puts can help offset the losses on your long-term holdings. There’s a reason why they say billionaires are made in bear markets. Adding great stocks at depressed prices can provide incredible long-term gains in the future.