The US stock market is experiencing the worst start to a year in five decades. Technology stocks, long a favorite of investors, are collapsing. And yet investors don't seem bothered. I count five bear or near-bear markets in my adult lifetime, and I don't recall investors ever being this sanguine about a declining market.
One reason might be that, technically, this isn't a bear market, which is generally defined as a decline of 20% or more from its most recent peak. The S&P 500 Index briefly dipped into bear territory on May 20 but rallied back by the end of the day. It's down about 14% from its record high in January. So investors haven't yet been bombarded with scary headlines that typically accompany a bear market.
Another reason could be that investors are becoming better at tuning out the market's gyrations. With every selloff, they gain confidence that the market recovers eventually, even from harrowing declines like the dot-com bust in 2000 or the 2008 financial crisis. That may also explain why, by all indications, most investors hung on to their stocks during the pandemic-induced selloff in 2020.
But there may be another, more concerning, explanation. Bear markets have become ever shorter over the past two decades, which may be giving investors the mistaken impression that stock market selloffs are brief, if uncomfortable, affairs. Consider the recent trend. It took the S&P 500 two and a half excruciating years to reach a bottom during the dot-com bust. The next downturn during the financial crisis lasted about 18 months from peak to trough. Then came two near-bear markets, a decline of 19.4% in 2011 that lasted five months and 19.8% in 2018 that lasted three months. And finally, the most recent bear market in 2020 lasted just 33 days.
A longer view of history, though, shows no reliable pattern around the duration of bear markets. The record back to 1928 reveals brief downturns sprinkled throughout, according to numbers compiled by investment strategist Ed Yardeni. The 1946 bear market, for example — a decline in the S&P 500 of 27% — lasted about four months. The one in 1957 lasted three months and was followed by two bear markets that each lasted less than a year. But those were followed by four long, brutal bear or near-bear markets from 1968 to 1982.
Interestingly, longer bear markets don't necessarily mean deeper declines. For instance, the S&P 500 dropped 34% during the 33-day selloff in 2020, but it took nearly two years to decline 27% from 1980 to 1982. While the outcome may be roughly the same, duration makes a big difference. In 2020, investors barely had a chance to catch their breath before the market turned higher again. A multiyear selloff, on the other hand, is so painful for so long that many investors eventually give up.
It's easy to underestimate the torment of an extended bear market if you've never encountered one. Neither millennials nor members of Generation Z were old enough to experience the dot-com crash, the most recent multiyear bear market. Reading about it isn't the same as living it, obviously, but for the uninitiated, it's worth reflecting on the anatomy of that downturn.
