What to Know About Bear Markets

While investors have endured the sting of selling pressures for the past several months, the S&P 500 recently crossed from correction into bear territory. Although the latest selling pressure marked the official tipping point into bear territory, the major indices had been flirting with the level for weeks. Some stocks — including many of those we classify in the hopes, dreams, memes, and themes group — have been in a bear market for much longer.

First, let’s define bear market. While there are numerous definitions, we consider a decline in the stock market of 20 percent or more as a bear market. Pullbacks of 10 percent to 19.9 percent are generally considered corrections. Neither a correction nor a bear market is considered over until the market recovers to its previous high. While the 20 percent drawdown threshold is arbitrary — as is the 10 percent decline trigger used to define a correction — the parameters are useful for studying significant down markets across time.

Since 1950, the stock market has experienced 25 corrections and 11 of those have gone on to become bear markets. This means on average; investors experience a correction every 3 years and a bear market every 7 years. The last bear market lasted for one month during the beginning of the COVID shutdown.

Role of the economy

When it comes to market declines, it’s important to understand the stock market and the health of the economy are intertwined. There have been many market downturns over time with varying levels of severity and different lengths of recovery.

The three worst drawdowns since 1950 occurred in 1974 during the oil embargo and President Richard Nixon’s efforts to implement price controls; in 2002 after the bursting of the Dotcom bubble; and 2009 during the Great Financial Crisis, when consumer and corporate debt loads were untenable and the real estate bubble popped. While we continue to believe the U.S. can avoid a recession, if one were to occur this year or in early 2023, we believe the financial strength of consumers and corporations make it highly unlikely we would see anything resembling the three biggest market shocks of the past 70 years. That said, even short, shallow bear markets are painful. However, past downturns and recoveries can present a better picture of potential market performance. Because no one can predict market declines with certainty, staying invested through multiple market cycles is typically the best solution for a long-term investor.

Staying focused

While difficult to predict and unpleasant, volatility is a normal function of the stock market. While we remain optimistic and believe that markets have room for upside, the reality is that at some point a recession will come. If so, we believe any such recession would be mild given the financial strength of consumers.

If you’re concerned about how volatility, inflation or a recession could impact your financial plan, you should have a conversation with your advisor. The fact is wealth isn’t only generated when times are good but also by the decisions you make when the markets are under pressure. When others feel the need to react and sell out in the face of short-term pain, we tune out the noise. A financial plan is built for both good times and bad. The ability to remain steadfast with your investments is an opportunity for growth, helping capture the upside when the markets eventually recover. It’s how we drive value over time. We’ve seen that playing the long game tends to win, generation after generation.

The opinions expressed are those of Northwestern Mutual as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. This material does not constitute