What to make of stocks entering bear-market territory

No one can predict when the current decline will end, but history has proven the benefits of long-term thinking.

Mar 13, 2020 | Brian Levitt

Investors with a 50-year investment horizon will live through, if history is any guide, 14 bear markets over the course of their investing lives.1 That’s a bear market once every 3.57 years.2 History would also suggest that during those bear markets, investors should expect their equity portfolio to lose, on average, 32% (median 28.8%).3 It’s almost enough to make investors wonder why they put money in equities at all. Yet, stocks, as represented by the S&P 500 Index, returned, on average, 10.5% per year over the past 50 years.4 That’s a doubling of their investments, on average, every 6.9 years, notwithstanding all the bear markets.5

Much is being made of the S&P 500 Index entering bear-market territory on Wednesday — defined as a 20% drop from a recent market high. It was the first time US stocks had done so in 11 years. Many were quick to declare, “the longest market cycle on record is over.” Technically that may be true, but it is also largely semantics. Even this record cycle experienced significant drawdowns. There were the near 20% drawdowns of 2011 (during the European debt crisis and US government credit downgrade) and 2018 (in response to the US-China trade war and US Federal Reserve interest rate hikes). That history can’t be ignored. Even 2016’s 15% market drawdown (in reaction to the Chinese currency devaluation and Fed interest rate hike) felt particularly harrowing at the time. Nonetheless, the US equity market is up nearly 350% since March 2009 (as of March 11, 2020).6

These facts may be of cold comfort to investors and financial professionals who are contending with the uncertainties of the coronavirus outbreak and struggling to comprehend the potential loss in economic activity and corporate earnings in the coming weeks. Candidly, we are all grappling with these issues together. At times like these, there is a tendency to focus on what we want now, instead of what we want most. For many of us, what we want now is safety for our loved ones and for our investment portfolios. Still, what we want most is long-term financial security. We know that equities, more than any other asset class, have historically been the greatest wealth compounder. Therein lies the rub.

Timing the market is nearly impossible

It’s important to use historical facts to overcome emotion.  Most investors, by now, have seen the research demonstrating that missing the best 10 days in the market over a 20-year period would cut their returns in half while missing the best 30 days would actually lead to negative long-term cumulative return.7  Alas, most promoters of that research fail to communicate the most important points: 1) Fully half of the market’s best days in history have happened during bear markets and, 2) Another 30% of the market’s best days have happened in the first two months of a recovery.8  In short, timing the market is often a fool’s errand, particularly during the depths of extreme pessimism. 

Finally, I’ll conclude (for the second time this week) by reminding investors of the 20-year period from 1998 to 2018, a period which included the tech wreck, the Sep. 11 terror attack, the global financial crisis, the European debt crisis, Brexit, and many infectious disease scares (H1N1, SARS, Ebola, and MERS) and the S&P 500 Index still climbed 7% per year.9 A $100,000 investment in the market in 1998 would today be worth over $400,000.10

We will get through this by applying the same key principles we have applied in each of the other crises and bear markets of our multi-year investment horizons: think long term and stay the course.

Brian Levitt is the Global Market Strategist, North America, for Invesco.


^1 Source: Standard & Poor’s as of March 11, 2020

^2 Source: Standard & Poor’s as of March 11, 2020

^3 Sources: Bloomberg, L.P., Standard & Poor’s as of March 11, 2020

^4 Source: Bloomberg, L.P. as of March 11, 2020

^5 Source: Bloomberg, L.P. as of March 11, 2020

^6 Source: Bloomberg, L.P., the market as represented by the S&P 500 Index, as of March 11, 2020

^7 Source: Bloomberg, L.P., Standard & Poor’s, as of Dec. 31, 2019

^8 Source: Bloomberg, L.P., Standard & Poor’s, as of Dec. 31, 2019

^9 Source: Bloomberg, L.P. as of Dec. 31, 2018

^10 Source: Bloomberg, L.P. as of March 11, 2020

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