Will This Be an Abnormally Long Bear Market? 1 Unorthodox Indicator Weighs In

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Although Wall Street offers few guarantees, one you can absolutely count on is that stock market corrections, crashes, and bear markets are a normal part of the long-term investing cycle.

Thanks to data compiled by sell-side consultancy company Yardeni Research, we know there have been 39 separate double-digit percentage declines in the benchmark S&P 500 (^GSPC -1.10%) since the beginning of 1950. On average, that’s an official correction every 1.87 years.  

Last year, the Dow Jones Industrial Average (^DJI -1.19%), S&P 500, and Nasdaq Composite (^IXIC -0.74%) all respectively entered bear markets. As of March 15, it’s been 436 calendar days since the widely followed S&P 500 started its decline and 435 calendar days for the iconic Dow Jones Industrial Average. It has both new and tenured investors wondering when, exactly, this bear market will end.

The possible answer to this question may be found by examining an indicator we don’t often think of analyzing when trying to forecast the end of a stock market downturn.

A bear figurine set atop newspaper clippings of a plunging stock chart and declining quarterly bar chart.

Image source: Getty Images.

Will this be a historically long bear market?

Utilizing Yardeni’s data set, there have been 10 official bear market declines since the beginning of 1950, not including the current bear market. I say “official” in the sense that a line in the sand is being drawn at 20%. Previous corrections in the S&P 500 that bottomed at 19.9% and 19.8%, respectively, aren’t being included in this total.

Over the previous 10 periods when the S&P 500 declined by at least 20%, not including the ongoing bear market, the S&P 500 collectively spent 3,888 aggregate days in a bear market. It means the average bear market over the past seven-plus decades has lasted 389 calendar days, or about one year and just shy of one month. As noted, the current bear market for the S&P 500 has already surpassed this average by 47 calendar days (and counting).

However, Federal Reserve monetary policy — which is something investors don’t often think of with regard to bear market bottom correlation — can offer clues as to how close, or far away, a bear market nadir might be for the S&P 500, Dow, and Nasdaq Composite.

Normally, the nation’s central bank takes a dovish stance on monetary policy and lowers its federal funds target rate to encourage lending when the U.S. economy falters or when Wall Street’s foundation shows signs of cracking.

But things aren’t exactly “normal” right now. The U.S. economy is coming off of its highest year-over-year rate of inflation in four decades, as of June 2022 (9.1%). This means the Fed has had no choice but to continue to devote its attention to raising interest rates and taming the pace of rising prices.

Effective Federal Funds Rate Chart.

Effective Federal Funds Rate data by YCharts.

While a lot of investors are waiting for an eventual “Fed pivot,” whereby the central bank pauses rate hikes or even signals when future rate cuts might begin, data from the past 24 years shows that rate-easing cycles don’t offer immediate relief for investors.

Over the past 24 years, there have been three notable rate-easing cycles, which respectively began on Jan. 3, 2001, Sept. 18, 2007, and July 31, 2019.  Although it became clear during these events that the Fed was stepping in to shore up markets and/or provide a boost to economic activity, it took 645 calendar days for the S&P 500 to bottom out following the start of rate cuts in 2001, 538 calendar days after the start of cuts in 2007, and 236 calendar days post 2019 cuts. For those of you keeping track at home, that’s an average of 473 calendar days following the start of rate cuts before Wall Street found its footing.

According to the “Summary of Economic Projections” (also known as the “dot plot”) released in mid-December, none of the Federal Open Market Committee’s voting members foresee the federal funds target rate being lowered in 2023.  This means the first chance of a rate cut would be in 2024, with the average length of time for a stock market bottom being 473 calendar days after the initial reduction.

While Federal Reserve monetary policy and rate-easing cycles aren’t concrete tools that can time stock market bottoms, this historical data does suggest this could be an abnormally long bear market.

A person reading a financial newspaper while seated at a table in their home.

Image source: Getty Images.

There are, indeed, smart ways to invest during a bear market

Making matters a bit more troubling, a host of recession-probability indicators have been tilting toward a greater likelihood of the U.S. entering a downturn sometime in the not-too-distant future. At no point since the end of World War II has the stock market bottomed prior to the National Bureau of Economic Research declaring a recession.

But in spite of this noise, patient investors have one of Wall Street’s rare near-guarantees working in their favor.

Every year, market analytics company Crestmont Research updates its data on the hypothetical rolling 20-year total returns (including dividends paid) of the S&P 500 since the beginning of 1900. In other words, Crestmont’s data annualizes the total return of what an investor would have received if they purchased an S&P 500 tracking index and held it for 20 years.

Among the 104 ending years that can be examined since 1900 (i.e., 1919 through 2022), every single one yielded a positive annualized total return. No matter when you purchased an S&P 500 tracking index, you made money as long as you committed to your investment thesis for 20 years. In about 40% of those ending years, your annualized total return would have been at least 10.8%. 

The data is very clear that patience pays off on Wall Street. It also means the current bear market is the perfect time to put your money to work.

Based on Crestmont’s data, index funds and exchange-traded funds (ETFs) are one avenue to explore. There are more than 3,000 different ETFs for investors to choose from, which means there’s something for every type of investor.

Another smart way to invest during a bear market is to stick with dividend stocks. Companies that pay a dividend have a long history of outperforming publicly traded companies that don’t offer a regular payout. It also doesn’t hurt that companies paying a dividend are almost always profitable and time-tested. In short, these aren’t companies investors will have to worry about if an economic downturn does arise.

The core point here is that continuing to invest during bear markets is statistically a smart move.