Two the Point — Anatomy of a Bear Market

Although the “official” definition is somewhat arbitrary, the 20% decline in the S&P 500 puts us in bear market territory.  What should investors expect going forward?  A lot depends on if the economy enters a recession.  As we have said in previous notes, the probability of a recession is elevated.

Interestingly, not every recession has led to a bear market – four of the most recent 15 recessions have not. Also, not every bear market occurs because of a recession. Prior to 2022, there have been 19 bear markets over the past 94 years, or about 1 every 5 years. What we know is that, on average, the most severe stock market declines have occurred during “recessionary bear markets”. For example, when recessions overlap with bear markets, the average decline is 42.5% (median of -36%), the typical downturn lasts 22 months, and it takes six years on average for the market to surpass its previous peak. During non-recessionary bear markets, the average peak-to-trough decline is 24.3% (median of -21%) and stocks bottom over a much shorter period – eight months. Perhaps most importantly, it takes investors an average of 17 months to recoup their losses.

Stock prices usually start to fall well in advance of a downturn in the economy, usually 6 to 12 months before there is notable weakness in the labor market, corporate profits, and lending activity. On the flip side, stock prices usually climb higher before the economy troughs – 2020 being the most recent example. This is why we place such a large emphasis on leading economic indicators like manufacturing PMI.  These data series move coincidentally with the stock market unlike other popular indicators like GDP which lag stock market performance.  Stocks often bottom around the time, plus or minus one or two months, manufacturing PMI reaches its trough. Based on a variety of indicators, we think manufacturing PMI will bottom some time in 2023. 

Key Bear Market Statistics

 Recessionary Bear MarketsNon-Recessionary Bear Markets
Average Decline42.50%24.30%
Peak-to-Trough (Months)228
Surpass Previous Peak (Months)7217
Source: Bryn Mawr Trust; FactSet