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Today's market downturn: big bear or baby bear?

Today's market downturn: big bear or baby bear?

October 04, 2022

Today's market downturn: big bear or baby bear?

A bear market is defined as a decline of 20% or more from the most recent peak. As of the time of writing, we’re in a bear market in many equity markets around the world. But we know that not all bears are equal. We think the question really is: Are we in a big bear market or a baby bear market? Either way, the answer could make a big difference for investors.

If we were to use the S&P 500 Index as a point of reference and tweak the bear market definition slightly to a market sell-down of 19% or more, then the United States would’ve experienced 15 bear markets since the 1950s.1 Further, if we were to create two categories for bear markets—a baby bear that typically occurs outside of a recession and a big bear that only emerges amid a recessionary environment—then the U.S. stock market would’ve been home to eight big bears and seven baby bears in the last 70 years or so.

Unsurprisingly, the seven baby bears we’ve met so far had been somewhat gentler relative to their bigger peers, notching up an average market drawdown of approximately 23% between them. If we were to remove the 1961 baby bear market (down 28%) and the stock market crash of 1987 (down 33%), the average drawdown between the remaining five baby bears would be even lower—closer to 20%. The market’s experience with big bears has been slightly more traumatic: The average market sell-off between the eight big bears was closer to 37%.2

Big bears vs. baby bears (non-recession bear markets)
Here’s a chart that shows the extent of market drawdowns (in percentage terms) of bear markets since 1950. The bear markets are divided into two groups: baby bears (bear markets that occur outside of a recession) and big bears (bear markets that occur in a recessionary environment).

Source: Bloomberg, Manulife Investment Management, as of 7/25/22.

As Mark Twain is reputed to have said, “History doesn’t repeat itself, but it rhymes.” Are there lessons that we can take from the history of bear markets?

U.S. economic activity—and globally—has begun to slow materially since the beginning of the year due to rising interest rates and higher levels of inflation, and are now indicating an elevated risk of a recession in the first half of 2023. If we can indeed avoid a recession, the drawdown in the S&P 500 Index, as of this writing, is already in line with the historical performances of baby bears.

On the other hand, if we were to experience a recession, history would suggest that more downside could be likely since the average big bear sell-off is 37%. That said, if we do slip into a recession, we expect it to be mild, supported by a solid employment environment and a stable U.S. consumer. In our view, the odds of a deep recession over the next 12 months remain low and we’re unlikely to enter into an environment that’s similar to the following:1

  • the great financial crisis of 2008 (GDP decline of 5.1% and market drop of 57.0%)
  • the 1973/1974 recession (GDP decline of 3.2% and a market drop of 48.0%)
  • the dot-com crash of 2000/2001 (mild recession accompanied by an unprecedented sell-off in tech stocks)
  • the September 11 attacks (the S&P 500 dropped 49.0%)

Said differently, we believe much of the potential of a mild recession has already been priced in by the markets.

If we were to accept that this is indeed a recessionary mild bear market, then the key question we need to consider is at what level (from the peak) should investors start considering adding back to equities. While it’s impossible to forecast future market behavior, we turned to historical market performance to establish a sort of framework that could be used as a point of reference. We studied market behavior during past big bear markets and tabulated stock market returns in the first, second, and third year following declines of 10%, 20%, 30%, 40%, and 50% from the market peak, respectively.2

What we noticed is that in deeper big bear markets (e.g., 2008/2009, 2000/2002, and 1973/1974), the true buying opportunity (whereby gains were one or two years away) didn’t occur until equities were 30% or more off of their respective peaks (which isn’t too far from the 37% big bear average). In shallower big bear markets (e.g., 1990/1991, 1980/1982, and 1970), the buying opportunities emerged sooner, following drops of as little as 10%.

We believe the current episode to eventually reveal itself as a big bear market, but it’s likely to be the more shallow type. If we’re correct and the economic slowdown results in only a mild recession, then it appears to us that the U.S. equity market has already priced in much of the bear market.

S&P 500 Index: returns over different periods following sharp drawdowns
Chart showing the forward total returns in the one-, two-, and three-year periods after eight recessionary bear markets since 1956.

Source: Bloomberg, Manulife Investment Management, as of 7/25/22. The S&P 500 Index tracks the performance of 500 of the largest publicly traded companies in the United States. It is not possible to invest directly in an index. Past performance does not guarantee future results.

Finally, we need to attach realistic timelines to the equity market recovery. It’s important to understand how long it took—historically—for investors to recoup their initial investment once the markets had hit a bottom during previous bear markets. According to historical performance, following a 20% drop from the peak, it took approximately 306 trading days—on average—for investors to break even from a recessionary bear market, versus 13 trading days in a non-recessionary environment.

Number of days required to reach prior peak S&P 500 Index level

Bear markets (recessionary and non-recessionary) since 1950

This chart shows the average number of trading days it took for investors to break even on their initial investment once the markets had bottomed during previous recessionary and non-recessionary bear markets, since 1950, at drops of 10%, 20%, 30%, 40%, and 50%.

Source: Bloomberg, Manulife Investment Management, as of 7/25/22.

Markets rarely move in straight lines. Bear market rallies can often be followed by sell-offs that retest previous lows. While it’s impossible to call a bottom for this bear market, history shows that investors have seen gains one, two, or three years further down the road. Bear markets are never fun to witness, but they have historically been an opportunity for the patient investor.


Bloomberg, as of 7/25/22. Manulife Investment Management, as of 7/25/22.

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.

The views presented are those of the author(s) and are subject to change. No forecasts are guaranteed. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. Past performance does not guarantee future results.

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