As stock markets around the globe hit the headlines on a daily basis, investors can be forgiven for fearing a bear market. But what actually is a bear market? How long do they last on average? And why do investors dislike them so much?
As a long-term investor, I think bear markets are great, and I’ll tell you why. But first, let’s pin down what they are.
Length of an average bear market
I see claims that a bear market is a fall of 20%, or more, from a recent high point, or perhaps over a period of two months-plus. But I think that definition is only useful for scaremongering headline writers. Two months is barely a blink for a long-term investor.
I prefer to think of a bear market as just a general decline over a long-ish period of time.
Ben Laidler, Global Markets Strategist at eToro, has just given us a handy quote, speaking of the “average bull market surging near 180% and lasting 60 months, four times as long as a typical bear market.”
Longer bear markets, please
Wikipedia backs that up, saying: “From 1926 to 2014, the average bear market lasted 13 months with an average cumulative loss of 30%“.
The S&P 500 has just dipped into technical bear market territory with a 20% dip, though the FTSE 100 is fine. But we really have no idea yet whether that will turn into a bear market to rival the Covid-19 slump.
As for the pandemic-induced dip, many investors seem to be relieved that the UK stock market has already recovered to pre-Covid levels. So why am I disappointed that share prices didn’t stay low for longer?
Buy low, not high
I’m still a net buyer of shares. So I want to see low, not high, prices. And it still puzzles me why many investors with years of buying ahead of them are happiest when markets rise.
I took advantage of the pandemic market crash by buying more shares cheaply. But wouldn’t it be great if I still had the opportunity to invest next year’s money at last year’s prices?
As well as providing us with cheap shares to buy, there’s another big benefit to a bear market. In a bull market, investors are typically less critical when analysing the companies behind their investments. And markets can continue for years on valuations that look very high by traditional measures.
A welcome correction
But when a bear market comes along, closer scrutiny can lead to a much-needed shake-up. I reckon we’re seeing exactly that with the NASDAQ right now. In my view, US technology stocks have been overpriced for years.
Overvaluation of big profitable companies is bad enough. But unprofitable start-ups with no clear idea of when the money might start rolling in were carried along on their coat tails. The NASDAQ Composite is down more than 25% so far in 2022, and deflating that bubble surely has to be a good thing.
Anyway, my final take on the length of the average bear market? While I’m still buying shares, it’s not long enough.