Bear markets in a historical perspective

by Bjørnar Mundal, on 19 March 2020 15:15

Bear markets has occurred before and will most likely occur again. We are currently in the middle of a period of dropping markets around the world. Are there any takes from history that can be used to assess todays situation?

We have looked at S&P 500 from 1928 and analysed bear markets as classified by the following definition: 

“The market drops by more than 20% and do not recover to previous peak within 12 months”.

We do not yet know with certainty whether the market-fall caused by COVID-19 can be defined as a bear market using this definition. What we know is that the drop, by itself, has been large enough to qualify as a bear market. Time will show whether the S&P 500 will reach its peak within 12 months or not.

Based on this definition S&P 500 has since 1928 been through 13 bear markets:

Bear markets


Length of bear markets: 

Our analysis show that the average bear market has a length of 485 days. The shortest bear market was observed during the autumn of 1987, lasting 74 days, while the longest bear market was observed during WWII, lasting 1340 days.  If history will repeat itself, there are more days of negative return ahead, considering that we have passed the peak with only 21 days.

Length of bear market


Size of drawdown: 

S&P is currently down approximately 30% since the peak on February 19th. This means that we have already surpassed the smallest drop among the 13 historical bear markets, measured to -22% in the mid-60s. The largest drop historically was -86% during the Great Depression. On the other hand, the average drop during a bear market is measured to be -41%.



Performance after bottom: 

Dropping markets often leads to fear and large sell offs. When the markets have been through a dip, it is interesting to see the performance of the markets after we have reached the through of the bear market. The following graph shows the performance of the S&P500 1M, 3M, 6M and 12M after we have reached the bottom:

Performance after 1M

Performance 3M

Performance 6M

Performance 12M

On average, the market increases 50% within the first year after the bear market. The largest increase observed was after the Great Depression, scoring a 121% increase.

The take from this is that even though things are currently looking bad, brighter times are ahead. The vital question is: how much further will it fall and how long will it last?