The table below gives key data for every S&P 500 Index bear market and National Bureau of Economic Research (NBER) defined recession since the Second World War.
We have the following observations from the historical data on bear markets and recessions:
- Since World War II, there have been 13 S&P 500 Index bear markets, defined as a decline of 20% or more in the index. There have been 12 NBER defined recessions since World War II.
- While bear markets and recessions usually happen together, this is not always the case. Bear markets and recessions had overlapping timeframes 9 times since World War II. Bear markets starting in 1946, 1961, 1966, and 1987 did not coincide with a recession. Recessions in 1953, 1960, and 1980 did not coincide with a bear market.
- The four most recent bear markets have all been associated with recessions.
- The average bear market has taken 389 days to reach bottom, with an average drawdown of 33%. It has taken an average of 23 months to recoup the loss from the bear market bottom. Recouping the loss has occurred in as little as 3 months and as long as 69 months.
- Severe bear markets coincide with severe recessions. The 1973 Arab Oil Embargo resulted in a recession that lasted 16 months and had a corresponding market drawdown of 48%. The Great Recession of 2008 saw a drawdown of 57% and a recession that lasted 18 months, the longest since World War II.
- While the bursting of the 2000 stock market bubble saw a bear market that lasted 2 1/2 years and ended with a 49% drawdown, the recession that occurred within this timeframe was relatively mild and lasted only 8 months.
- The 1990 bear market barely qualifies as a bear market with the maximum drawdown of only 19.9%. This event was associated with a mild recession that lasted only 8 months with the selloff recouped in only 4 months.
- Importantly, the last time the Federal Reserve tamed runaway inflation caused the 1980-1982 recession that lasted 16 months. However, the bear market only saw a 27% drawdown which was recouped in only 3 months once the Fed had tamed inflation. This was the quickest recovery from a bear market since World War II.
- All of this speaks to the uncertainty of the timing, length, and severity of bear markets and recessions. Stocks have rewarded investors for taking on this uncertainty by outperforming all other asset classes over long time periods.
- We also note the healthy underpinnings of the U.S. economy, which suggest a lack of catalysts for a significant recession. The banking system is very healthy while consumers have historically low debt-service levels, significant excess savings, and pent-up demand for homes, cars, and travel and leisure. All of this is dramatically different from the circumstances that led to the 2008 financial crisis, and severe recession and bear market.
Importance of Sticking with Long-term Investment Plans
While the uncertainty of the emerging post-pandemic economy currently has us cautious toward stocks and other risk assets, we emphasize the importance of sticking with long-term investment plans where stocks continue to play a critical role for maintaining future purchasing power.