Three Lessons from Three Bear Markets

We made it! The 2022-2023 Bear Market is officially over, as the S&P 500 set a new record high on Friday, January 19th, 2023.

This latest bear market is the third in five and a half years. Three! In only five years. Each one was unique and yet the same. There are some lessons we can learn from these. As Harry Truman said, “The only thing new in the world is the history you don’t know.”

Let’s review this past bear market and the two before it.

Three Bear Markets in Five Years

The 2022-2023 Bear Market

On January 4th, 2022, the S&P 500 hit an intra-day high of 4818. No one knew then that that was as high as it would get for a while. Russia invaded Ukraine. The fallout from handing out trillions of dollars in COVID-19 stimulus reared its ugly head in the form of 40-year high inflation. The market began to backslide.

For 292 days, it followed a herky jerk pattern down to 3,491 on October 13 of that year—down 27.5%. The Fed raised interest rates faster than ever before, stemming the tide of rising prices. It was the chemo we needed to kill the cancer of inflation. It was unpleasant but a necessary evil to destroy inflation.

The market began to recover. Doomsday articles abounded, but the market could not be stopped. It officially recovered on January 19th, hitting a high of 4,882, a process that took 463 days, with two years and fifteen days between peaks.

The Covid Crash

We all remember the bear market before this last one. It will be referenced in the stock-market history books for all of the future.

On February 19th, 2020, the S&P 500 hit an intra-day high of 3,393. It then proceeded to have the fastest drop in market history, hurtling to 2,191 on March 23rd, a 35% drop in 33 days. But it recovered quickly; by August 18th, it had pushed to 3,395. The entire episode lasted 181 days.

Many predicted a “W” recovery. The pandemic was still in full swing! Half the economy was still shut down. There was no way that this recovery was real. They waited on the sidelines for the other shoe to drop. It never did.

The 2018 Barely Bear

What about the bear market before that? On September 21st, 2018, the S&P 500 hit 2,940. By December 26th, it was down to 2,346, a 20% drop in 96 days. And it had recovered by April 29th to 2,949, taking only 220 days from peak to peak.

There was no global catastrophe with this one, which is why so few people remember it. It barely hit 20% down to become an official bear market. You heard that right: it was barely a bear. But it still counts.

Why does this matter? Why relive these three bear markets? Because of the lessons we can learn and apply to the next three bear markets.

Three Lessons from Three Bear Markets

Here are three observations.

Bear Markets are Common as Dirt

I will repeat what I said earlier. We’ve had three bear markets in five years and four months. Three!. Three times in five and a half years where the value of 500 of the largest companies in the world declined by 20% or more. Those drops happened in as little as 33 days or as long as 300.

Since 1929, when the S&P was created (it was expanded to 500 companies in 1957), we have seen 27 bear markets! That’s one in every four years. However, many of them are so fast that they don’t end the year as a bear market. In terms of calendar years, there have only been 6 that have ended 20% down or more.

We’ve now had three in the last five years and four months. Does that mean they will become faster in the future? Maybe. We also had nine straight years preceding this one of bull markets. We may see that again to maintain a 1-in-4 average. No one knows. But what we do know is that bear markets are as common as dirt.

The Total Return of our Co-Owned Businesses is Remarkable

If I had told you in the summer of 2018 that we’d have three bear markets in the next five-plus years and the accompanying reasons for those declines, where would you have guessed the market would have ended up? Would you have guessed it would be up 66% after those three bear markets were over? Because that’s where we are now from the peak in September of 2018 and now. We are up 66% after three bear markets in 5.4 years.

That’s remarkable. As wild as the ride has been, you spartan investors who have stuck with me are up two-thirds. We may continue to see bear markets more frequently than in the past as information—and the requisite overreaction to it—continues to travel faster and fast. But if we are still getting a 9.5% average annual return through it, does it matter?

We will likely never see these lows again

I hope you bought up some of those deals after I released the “Bear Markets Aren’t Bad” episode in June 2022. You may have noticed above that the bottom of the 2022 bear market never touched the peak before and after COVID-19. With less than two years between them, the index had grown so much in 2021 that even after falling 27.5%, it remained 3% above the previous pre-bear peak.

This last point makes me wonder if we will ever see 4,882 again. Forget wishing we had bought at 3,491 in October of ’22; we may end up wishing we had bought at 4,882 in January of ’24. Because today’s all-time highs will someday be the lows that we compare future fabulous long-term returns to.

Conclusion

The best time to invest is when you have the money.

Stay the course,