With the stock market on one of its worst losing streaks in decades amid a relentless selloff that has pushed the S&P 500 nearly 20% below its record highs, recession risks are rising—but history shows that not all bear markets lead to long-term downturns and stocks can often rebound over the next year.
The benchmark S&P 500 index briefly fell into a bear market last Friday—at one point down over 20% from its peak in January—and continues to hover near that territory as surging inflation and rising rates lead to recession fears.
The last bear market was in March 2020, when coronavirus pandemic lockdowns sent the US economy into a recession, but that downturn was uncharacteristically brief compared to others in the past (the bear market between 2007 and 2009 lasted for 546 days).
“No two bear markets are exactly alike,” notes Bespoke Investment Group, pointing out that 8 out of 14 prior bear markets since World War II have preceded recessions, while the other 6 did not.
Once the S&P 500 does hit the 20% threshold, stocks typically fall by another 12% and it takes the index an average of 95 days to hit the end of a bear market, according to Bespoke data.
In more than half of the 14 bear markets since 1945, the S&P 500 hit a low point within two months of initially falling below the 20% threshold—and forward returns were largely positive, bespoke points out, with the index rising an average of 7 % and nearly 18%, respectively, over 6- and 12-month periods.
If the US economy can avoid falling into a recession, then stocks would be in a better position going forward: Bear markets that occur before a recession are more prolonged (lasting 449 days compared to 198 days with no recession) with steeper losses (an average decline of 35% compared to 28%), according to Bespoke.