Bull and Bear Markets (June 2022 Newsletter Excerpt)

Bull and Bear Markets (June 2022 Newsletter Excerpt)

A bear market occurs when the stock market goes down 20% or more. The S&P 500 crossed this line on Friday May 20, 2022 and rallied back up by about 6% by the end of the month.

We have almost 100 years of market data to help us get a sense of how normal this is, along with how much more significantly robust bull markets are over bear markets. This is what the bull-bear cycles have looked like going back to the start of the Great Depression:

Oddity #1: Back So Soon, Done So Fast?

Historically, bear markets happen every 4-5 years. It is strange that we have experienced another one only 26 months after the last one. To be very clear, it is far too early to declare this bear market cycle “over.” Although we have recovered some from the recent bottom, it’s certainly possible we could return it and press deeper.

That being said, bear markets last an average of 12 months until the next bull market starts. If it turns out that May 20 was the bottom, then the length of this bear market was only 5 months. Should this prove to be the whole cycle, it wouldn’t be totally surprising since we just came off of one.

Oddity #2: Long Losing Streak

The other strange thing that happened on May 20, 2022 is that it was the seventh consecutive week of stock market declines. This was the longest “losing streak” for the S&P 500 since 2001. However, when we average out the returns following long losing streaks (in our analysis we used losing streaks 6 weeks or longer), the average return one year later has been more than 10%.

There is also a Part B to this. Historically, if bear markets are not coupled with a recession, stocks have often soar after the drop. As we discussed last month, there is a chance that we are currently in a recession. The first quarter of 2022 had negative GDP growth. However, while possible, our view is that it’s unlikely that we would enter recession before early 2024.

Going back to current events, if the stock market does not dip back into bear territory, it was indeed among the quickest and most mild bear market in history.