The S&P 500 Price Index‘s eleventh bear market has not yet been officially closed, but are we still in a bear market? Typically, we report on the end of a bear market once the index sets a new peak close, meaning it closes at a price higher than ever before. However, the “real end” of a bear market in historical accounting is once it reaches a relative bottom, the lowest it falls from the prior peak before setting a new peak. Because the markets are inherently volatile and will rise, fall, rise again, and fall again, you can’t know that you’ve had the relative low that ended the bear market until a new peak close is set and the next bull market has effectively already finished.
Our current bear market began on January 3, 2022 when the S&P 500 reached a new peak closing at 4,796.56, and our current relative low of 3,577.03 was on Wednesday, October 12, 2022, down -25.43% from the January 3 peak close. This is only a current relative low, as we have not yet set a new peak closing. April 14, 2023 closed at 4,137.64, which is -13.74% down from the prior high but +15.67% up from the relative low. As of April 14, 2023 we still don’t know if the bear market is over, but it is possible that October 12 has already marked the accounting end of our current bear market. It is also possible that the markets will fall again, below even the October 12 value, and history will tell us that the bear market is continuing onward past April 14.
This hindsight requirement means that investors’ experience of bear markets differs from the historical accounting. Investors’ experience of a bear market is the full time period between prior peak close and new peak close when the index has fallen more than -20% at some point in that time period. When measured this way, from December 30, 1927 to April 14, 2023, the S&P 500 Price Index had 14,837 trading days where investors either were in a bear market or weren’t sure if the bear market had ended yet. That is 61.99% of the trading days.
This can be compared to splitting the time period instead into days below a prior peak and before a relative bottom and days after a relative bottom and before a prior peak. Ending this analysis on the last peak close of January 3, 2022 and counting only time periods where there was a more than 20% drop, the S&P 500 Price Index spent 24.81% of the time going down to a relative bottom in a bear market and 75.19% of the time going up to a new peak close after a bear market.
This incongruity between feeling like we are in a bear market for 61.66% of trading days and actually being in a bear market for only 24.81% of those days unfortunately contributes to investor panic and makes bear markets feel longer and more drawn out than they really are.
From December 30, 1927 to January 3, 2022, the average number of calendar days going down before reaching a relative bottom in a bear market was 476.82 and the average number of calendar days going up after a bear market before reaching a new peak close was 1,445.18.
The longest number of calendar days before a relative bottom was 989 days during the crash between September 16, 1929 and June 1, 1932, and the longest number of calendar days before reaching a new peak close was 8,148 days, between June 1, 1932 and September 22, 1954.
The shortest number of days is obviously 1 day. The market gyrates up and down frequently. During the 23,935 trading days between December 30, 1927 and April 14, 2023, the S&P 500 has set 1,340 peak closes (5.6% of trading days). Despite that, the average number of trading days between peak closes is 17.86 trading days, because 750 of the new peak closes (55.97% of peak closes) were set 1 trading day after the close before.
So, did the bear market of 2022 continue into 2023? No one can answer this question yet, but the answer should not change your investment strategy.
We have no crystal ball here at Marotta. We strive to utilize a portfolio strategy that does not require market timing to be successful. We think the contrarian effect of rebalancing on a historically justifiable portfolio gives the best chance of weathering the market ups and downs. We take comfort that studies in the markets suggest that investing funds immediately is typically very advantageous and even the literal worst market timing is better than not investing.
Stay the course. The recovery may already be happening. The stock market is a powerful financial asset for those wise enough to remain invested and diversified during all kinds of economic movements.
Photo by Danika Perkinson on Unsplash. Image has been cropped.