What It Takes for a Bear Market to Turn Around
Narrator: When stocks take a steep drop, investors can come face to face with a bear market. This is one they encountered in March, 2020.
Reporter: It’s been fierce and fast and ferocious; the selling has been and that’s what really has caught everyone off guard.
Gunjan Baner Ji: Bear markets tell you that the stock market has fallen quite a bit. And it’s an indicator that major indexes are significantly off their highs. And it’s a sign that people are pretty fearful about the market right now.
But just like facing an actual bear, some analysts say the best thing to do when a bear market is approaching is to stay calm and not make any sudden moves. Here’s how markets make their way into bear territory and what has helped turn them around in the past.
Narrator: Stocks enter a bear market when they lose at least 20% of their value from a recent high. Let’s look back at the 2020 chart. You can see when the market started to fall in February, it entered a bear market here just under a month later. The term is a shorthand way for Wall Street to mark when stocks have taken a tumble, a sign that investors are anxious about the future and moving away from risky assets.
Gunjan Baner Ji: There’s a number of things that can make investors more risk-averse. One, they can grow concerned about how stocks are valued and say, is this stock really worth what I think it’s worth, or worth the premium that I’m putting on it? Have valuations run up too far, too fast?
Narrator: This was a factor in a bear market in 2001 when a bursting market bubble drove down stock values.
George W. Bush: I believe I was asked about the markets today. I’m sorry people are losing value in their portfolios.
Gunjan Baner Ji: Another really important factor is the economy. Often, bear markets have been affiliated with economic recessions. So that’s one thing that can really put investors on edge.
Narrator: Recessions have accompanied nine of the last 17 bear markets. And while one doesn’t necessarily cause the other, problems in the economy can be a major factor in bringing stocks down. High inflation contributed to one of the longest bear markets in history in the 1970s. Other things that can lead to bear markets are big events that threaten corporate profits. For example, that drop in stocks we looked at from 2020 was caused by the beginning of the coronavirus pandemic, when investors were anxious about the effect the virus might have on the economy.
Gunjan Baner Ji: Often, investors start to get concerned about the levels of uncertainty out there, and they decide, it’s time for me to dump stocks. That can drive prices down.
Narrator: So to review, a bear market occurs when stocks have dropped by a certain amount, but what turns them around? Stock prices depend on a variety of factors that can change quickly or slowly.
Gunjan Baner Ji: There’s the fed, there’s the economy, there’s US corporations, there’s consumer behavior, you have to take into account all of those things.
Narrator: For the bear market to go back into hibernation, stocks need to rebound by at least 20% from their bottom point, flipping into a bull market. The S&P 500 on average spends about 142 trading days from the time it enters a bear market to the time it exits. This chart shows five recent times the S&P 500 went into a bear market, starting from when the market began to decline, to when it made a full recovery.
After stocks started falling in 2000 when the .com bubble burst, the index didn’t hit bottom for over a year and a half, and it took until 2007 to swing back to where it started.
Gunjan Baner Ji: Part of the reason that did take so long to recover was just the sheer magnitude of the boom in stock prices, which made the bust just so, so dramatic. And it took years for us to reclaim those highs.
Narrator: But the 2020 bear market turned around in a record amount of time. It hit bottom after just 23 trading days and only took 126 days to swing to a new high. One of the biggest reasons for the rebound was the federal reserve and government stimulus. Stimulus checks and lower interest rates helped increase spending, indicating to investors that companies could make it through with government support. Measures like this also helped bring stocks up in other bear markets, like after the market crash in the late 2000s, though the recovery happened over a longer period of time.
“To break the adverse feedback loop, it is essential that we continue to compliment fiscal stimulus with strong government action to stabilize financial institutions and financial markets.”
Gunjan Baner Ji: When the fed steps in to provide more stimulus, historically that’s helped the stock market.
Narrator: Other things that economists and analysts say can make investors more confident and bring up stock values are corporate growth and strong employment numbers.
Gunjan Baner Ji: When people feel good about spending money or they’re more optimistic about the future, that can drive up stock prices and that can help the economy.
Narrator: But changing investor sentiment can take a long time, and the recovery can be a difficult waiting game.
Gunjan Baner Ji: For many individual investors, holding tight is often the best path forward. Historically selling stocks during bear markets has been a terrible idea.
Narrator: Which is to say, in the past, bear markets have always turned around and have sometimes resulted in high returns for patient investors. But bears are unpredictable. And the next time stocks take a steep dip, it could be years before investments pay off.
