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If the bear market that began in mid-February is average, the market will trade at a new all-time high in February 2023.
Whether you see this as good or bad news depends on your investment horizon. The prospect of three years without new highs will be disappointing if you’re a short-term trader who has been spoiled rotten in recent years by bull-market records being regularly broken.
If you have a longer-term perspective, in contrast, then a three-year hiatus need not be particularly unsettling.
The reason to even be focusing on this topic, of course, is that the Dow Jones Industrial DJIA, -9.99% as now dropped into semi-official bear market territory, by closing at least 20% below its previous closing high. You therefore may now be wondering how much longer and further this bear market is likely to last; if so, then be sure to take a look at the excellent analysis of fellow columnist Mark DeCambre.
Contrarian
Contrarian that I am, however, I want to focus on a different question: How long will it take for the market to recover from its bear-market losses and make it back to where it stood at its Feb. 19 high?
To find out what light history can shed on this question, I took the bear-market calendar maintained by Ned Davis Research, according to which there have been 36 bear markets since 1900. In each case, I measured how long it took for the S&P 500 SPX, -9.51% to subsequently claw its way back to where it stood when the bear market began.
The results are plotted in the accompanying chart; the average across all 36 bear markets was just over three years.
Note carefully that I took dividends and inflation into account. This is crucial because a failure to adjust for these factors paints an unrealistically pessimistic picture. On a price-only nominal basis, for example, it took the Dow Industrials until 1954 to make it back to where it stood before the 1929 crash — 25 years. In contrast, the inflation- and dividend-adjusted S&P 500 took “just” 7 ¼ years to do so.
The longest recovery time of any bear market since 1900, as you can see from the accompanying chart, was from the 1973-74 bear market. It wasn’t until late 1984 that the dividend- and inflation-adjusted S&P 500 made its way back to where it stood at its January 1973 high.
Inflation delayed recovery
The major culprit in that nearly 12-year recovery, I think it’s safe to say, was the double-digit inflation of the 1970s and early 1980s. That historical comparison provides some encouragement to us today, however, since inflation appears to be stubbornly low, not high.
To be sure, there’s no guarantee that the future will be like the past. And even it if is, there is a wide range of bear-market recovery times.
Still, at a time when panic is taking over Wall Street, there can be solace in this historical perspective.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
