One of the many problems with a bear market is that you never know for sure when it will finally hit bottom. That’s why it’s so risky trying to time the market so you can gobble up stocks at their cheapest — because they might just get cheaper.
Even so, there are ways to make an educated guess on when a bear market will bottom out, based on what has happened previously. An analysis of every bear market since World War II by Ben Carlson, a CFA and director of Institutional Asset Management at Ritholtz Wealth Management, found that the average time from peak to trough was 12 months.
If that’s the case this time around, expect the current bear market to hit bottom around the beginning of 2023, based on the fact that the last peak was in early January 2022.
The longest span between peak and trough was 31 months. That happened during the bear market of 2000-2002, Carlson wrote on his “A Wealth of Common Sense” blog. The shortest span was one month during the bear market that hit in early 2020, just as COVID-19 was spreading around the world.
A lot depends on how long bear markets last — something that’s impossible to predict. As a general rule, the longer the bear market, the longer it takes to hit bottom and then rise back up again.
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There are signs you can look for, however, and according to those signs the current selloff could still be in its early stages. That’s a troubling thought considering that this year the S&P 500 is off to its worst start since the Great Depression.
Why might the current bear market still have a long way to go before hitting bottom? Because stocks historically don’t bottom out until the Federal Reserve eases its monetary policy, according to The Wall Street Journal, and it could be a long time before the Fed eases its current tightening.
Since 1950, the S&P 500 has lost at least 15% of its value on 17 different occasions, the WSJ reported, citing research from Vickie Chang, a global markets strategist at Goldman Sachs. On 11 of those 17 occasions, the stock market hit bottom only around the time the Fed started loosening monetary policy again.
The Fed’s current tightening is probably still in its early stages. Last week the central bank raised interest rates by 75 basis points — the first time that’s happened since 1994. The Fed has signaled that it intends to raise rates several more times this year to rein in inflation. This has led to fears that the U.S. economy could fall into recession, which means investors will get even more jittery, and stocks will continue to fall.
If that turns out to be case, investors are well advised to remember one thing: Bear markets don’t last forever. They have always come to an end, and stocks have always headed back into bull territory.
“Maybe it’s just reassuring to know bear markets do come to an end even if you don’t know when it will be,” Carlson wrote. “I don’t know how much longer this bear market will last and I don’t know how long it will take to get back to new all-time highs … but I am confident those new highs are coming again at some point.”
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