Market bubbles expand, hold, and then hold more. Ultimately, they pop, deflate, and reset.
There has been much debate about what stage we are in of the current market cycle. The reality is that calling the exact moment a sustained downturn hits is nearly impossible. That is why preparation - not prediction - is the most important aspect of protecting a portfolio.
It’s best to plan ahead of any storm, and while markets are running hot and earnings season has been strong, it seems like a great time to check in on downside protection. We have fortified portfolio strategies while the equity markets have been in rally mode, adding to more lower risk investments. Our research partners still believe there is room for more upside return, leading to an opportune time to check in on how much runway is available in your overall financial picture.
Preparing for a downturn does not mean making dramatic allocation shifts from stocks to bonds or cash and does not require abandoning a long-term investment strategy. Instead, it is an opportunity to work toward ensuring your financial runway is firmly established.
Historically, most peak-to-trough market declines have lasted less than 24 months. For investors who may have limited earned income or upcoming withdrawal needs, maintaining a diversified reserve of bonds, alternatives, and cash that can cover approximately 36 months of spending can be an effective way to weather some of the most challenging market environments.
The Last Five S&P 500 Bear Markets
Bear Market | Peak → Trough | Trough → New High | Peak → New High |
1987 (Black Monday) | Aug. 25 – Dec. 4, 1987 (~3.5 months) | ~2 years | ~2 years |
2000–2002 (Dot-com) | Mar. 24, 2000 – Oct. 9, 2002 (~2.5 years) | ~5 years | ~7 years |
2007–2009 (Global Financial Crisis) | Oct. 9, 2007 – Mar. 9, 2009 (~17 months, -56.8%) | ~4 years | ~5.5 years |
2020 (COVID) | Feb. 19 – Mar. 23, 2020 (~1 month, -34%) | ~5 months | ~6 months |
2022 (Inflation/Rate Hikes) | Jan. 3 – Oct. 12, 2022 (~9–10 months, -25.4%) | ~15 months | ~2 years |
Data provided by Yardeni Research
A Few Patterns Worth Noting
- Depth and recovery speed are not closely correlated. The 2020 decline was one of the steepest on record, yet it also delivered the fastest recovery because it was largely driven by liquidity concerns and panic rather than a structural economic breakdown.
- Recession-driven bear markets typically take longer to recover. Both the 2000–2002 and 2007–2009 bear markets were tied to significant economic damage and required more than five years to fully recover.
- The climb back to prior highs is often the longest phase. In each example above, investors spent more time recovering losses than they did experiencing the decline itself.
Summary
- The takeaway is not that a bear market is imminent. Rather, it is a reminder that markets move in cycles, and prudent planning is often more valuable than accurate forecasting. Investors who establish adequate liquidity, maintain diversification, and remain disciplined through periods of volatility are generally appropriately positioned to work toward long-term financial independence.
- While no one can consistently predict when the next bear market will begin, history suggests that market declines are temporary and recoveries are inevitable. Investors who maintain a thoughtful allocation, keep adequate liquidity available for spending needs, and stay focused on long-term goals are often best positioned to navigate volatility successfully. The objective is not to avoid every downturn - it is to be prepared for one when it arrives.
Best,
Jay
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.