How Bear Markets Work

It’s hard to believe we’re debating a potential bubble right now considering we had a mini-blink-and-you-missed-it bear market in April.

That downturn feels like an out-of-body experience because it happened so quickly.

That first week or so of April saw back-to-back down days of -5% and -6%. A few days later the market was up almost 10% in a single day and we were off to the races.

These V-shaped rallies feel like a product of the information age where markets move faster than ever and are being driven more and more by outlier events.

That’s how it feels at least.

However, if you look at the average path of every bear market since 1950, the current iteration looks pretty darn close:

It’s not perfect but you get the waterfall drop followed by the big recovery on the other side of it. V-shaped rallies are nothing new. That’s the norm.

We’ve seen a similar profile in sector performance this year:

Technology and communication services (basically tech) both experienced massive drawdowns earlier this year but are now each sitting on 20%+ gains for the year. That’s another V.

Of course, these relationships are not set in stone. Consumer stocks also got hammered in the downturn but haven’t seen similar year-to-date gains.

Bear markets have some symmetry to them, at least in the short-term.

In the long-term, bull markets versus bear markets are asymmetric. Things are not balanced.

Look at the gains versus losses:

The bear markets are blips.

To be fair, those losses don’t feel like blips when you’re in them. Bear markets can be brutal. Losing money is not fun. Seeing a large portion of your portfolio get vaporized can cause you to question your sanity as an investor.

And yet…the bull markets completely overwhelm the bear markets.

It’s not even close.

That’s the beauty of the stock market. Despite all of the lousy things that can and will happen at times, it still pays to stay invested over the long haul.

You just have to survive many short hauls to get there.

Further Reading:
The Best Time to Invest

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