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Could the market remain in a bear market?

Could the market remain in a bear market?

We cannot deny that during the past few months the stock market has moved to bearish territories.  The Nasdaq is down over 27% YTD, The SPY is down almost 20% YTD, and the Dow Jones Industrial Average (DJIA) is down almost 15% YTD.

Considering that every major index has been declining in value since the year started, many analysts and experts have declared that we are now in bear market territory as the S&P 500 was down more than 20% for more than two months in a row.

During bear markets, stocks tend to go down as people are less willing to invest and add liquidity to the markets. This means that many portfolios have been in the red for several months now, leaving some people wondering if the stock market will ever reach new highs in the future. So, could the market remain in a bear market?  The short answer is that nobody can predict what happens in the future, but the stock market has always gone through bull and bear cycles over the course of  history. In many ways, a bear cycle can be just as inevitable as a bull cycle. However, let’s dive into  what caused this bear market and go deep in history to observe what happened in past bear markets and see if we can learn anything from that. 

What caused the current bear market?

Nobody can determine for sure what exactly caused the bear market that we are in. Usually, bear markets happen when the outlook of the future economy is uncertain, or even estimated to shrink in the following months. Considering the macro-economic scale that we find ourselves in, there are many indicators that show a potential global economic contraction. The main reasons to blame, according to specialists, are:

  • The Fed starting to aggressively hike interest rates
  • China still keeping its strict Covid lockdown measures, disturbing the supply chain and distribution globally
  • Russia’s invasion of Ukraine, causing a rise in oil prices and restricting trade between countries

Related: The Dollar is Strong in the Face of Inflation.

All of these macroeconomic events tend to create a strong dollar, as we can see the DXY (dollar index showing the strength of the dollar against other currencies and assets) is at its highest level since 2001.

During times of war, people tend to cash out of their assets and become extremely liquid. War is uncertain, and many people want to have dollars in their accounts in case of emergency situations. The Fed increasing interest rates means that it is tougher for people to borrow money, as the interest rates on loans and mortgages increase. This means that less people are able to afford the payments on homes compared to before, leading to less purchasing power across the board and a less favorable outlook on the economy’s future.

The main idea to remember here is that this bear market did not appear from nowhere; there have been clear warning signs throughout the entire year of 2022..

What does history say about bear markets?

Every bear market is different as people (hopefully) tend to learn from mistakes, so the economic and financial conditions we’re living in right now cannot be compared to previous bear markets, therefore we cannot predict when the bear market cycle will be over. However, statistically speaking it is true that bear markets tend to last longer than bull markets, as shown by this chart made by Invesco:

Bear Market History

History of bull and bear markets and the performance of the S&P 500 during those periods. Via [Invesco]

The historical average is that bear markets last around 10 months. This is only an average, as the longest bear market in history was during the Great Depression (1939-1942), which lasted 61 months, and the shortest bear market was in 1990, lasting only three months. Bear markets tend to have a drop in overall stock market price of at least 20%, with some bear markets experiencing a drop of 50% or more from previous highs.

Based on previous bear markets, it is tough to gauge how much longer is left in our current bear market. However, if history is to repeat itself then at some point markets will move back to bullish territory. This Bull/bear cycle has been happening in the markets for over 100 years. This doesn’t mean that the trend cannot reverse forever, but historically speaking the chances that the bear market will end at some point are high.

Related: Don’t Panic Now, The Recession Is Already Here: Here’s What To Do.

The Bottom Line

We might never have sufficient data to anticipate when the bottom of this market will be, or how long this bear market will last. Historically, markets go through bull and bear cycles all of the time.

A bull cycle tends to be followed by a bear one. Therefore, although technically speaking, the market can remain in a bear market, it is statistically unlikely that the market will remain in a bear one forever.

The worst days of the stock market are generally followed by some of the greenest days in the stock market, proving that timing the market is extremely difficult. Since nobody knows how long the market will go down or how fast the market will bounce, some people are still dollar cost averaging or investing a small amount of money into the major indices every week. This is one of many investment strategies out there and it’s not a recommendation. 

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