On March 11, 2020, the Dow Jones Industrial Average (DJIA) entered a bear market for the first time in 11 years, falling from all-time highs—approaching 30,000—to under 19,000 in just a few short weeks, amid the economic impacts of the global coronavirus (Covid-19) pandemic.

The next day, March 12, 2020, the S&P 500 and the Nasdaq followed suit. Throughout 2020 and into 2021, however, markets rebounded as optimism about vaccines and a global economic recovery took hold. Still, as the COVID19 case shows, bear markets can materialize, even amidst an otherwise healthy economy.

Key Takeaways

  • Bear markets are defined as sustained periods of downward trending stock prices, often triggered by a 20% decline from near-term highs.
  • Bear markets are often accompanied by an economic recession and high unemployment, but bear markets can also be great buying opportunities while prices are depressed.
  • Some of the biggest bear markets in the past century include those that coincided with the Great Depression and Great Recession.
  • The bear market that began on March 11, 2020, was brought on by many factors including the spread of the COVID-19 pandemic.

When the Bear Comes

One definition of a bear market says markets are in bear territory when stocks, on average, fall at least 20% off their high. But 20% is an arbitrary number—just as a 10% decline is an arbitrary benchmark for a correction.

Another definition of a bear market is when investors are more risk-averse than risk-seeking. This kind of bear market can last for months or years, as investors shun speculation in favor of boring, sure bets.

Several leading stock market indexes around the globe endured bear market declines in 2018. In the U.S., in December 2018, the small-cap Russell 2000 Index (RUT) bottomed out 27.2% below its prior high. The widely-followed U.S. large-cap barometer, the S&P 500 Index (SPX), just missed entering bear market territory, halting its decline 19.8% below its high.

Similarly, oil prices were in a bear market from May 2014 to February 2016. During this period, oil prices fell continually and unevenly until they reached a bottom.

Bear markets can happen in sectors and in the broadest markets. The longest time horizon for investors is usually the time between now and whenever they will need to liquidate their investments (for example, during retirement), and over the longest-possible term, bull markets have gone higher and lasted longer than bear markets.

Bears of All Shapes and Sizes

Bear markets have come in all shapes and sizes, showing significant variation in depth and duration.

The bear market that started in March of 2020 began due to a number of factors, including shrinking corporate profits and, possibly, the sheer length of the 11-year bull market that preceded it. The immediate cause of the bear market was a combination of persistent worries about the effect of the COVID-19 pandemic on the world economy and an unfortunate price war in oil markets between Saudi Arabia and Russia that sent oil prices plunging to levels not seen since the bursting of the dotcom bubble in 2000, September 11, 2001, and the second Gulf War.

Between 1926 and 2017, there have been eight bear markets, ranging in length from six months to 2.8 years, and in severity from an 83.4% drop in the S&P 500 to a decline of 21.8%, according to an analysis by First Trust Advisors based on data from Morningstar Inc. The correlation between these bear markets and recessions is imperfect.

This chart from Invesco traces the history of bull and bear markets and the performance of the S&P 500 during those periods.

courtesy Invesco.

At the end of 2019, analysts suspected a bear market might be coming, but they were divided on its duration and severity. For example, Stephen Suttmeier, the chief equity technical strategist at Bank of America Merrill Lynch, said he believed there would be a "garden-variety bear market" that would last only six months, and not go much beyond a 20% dip. At the other end of the spectrum, hedge fund manager and market analyst John Hussman predicted a cataclysmic 60% rout.

Bear Markets Without Recessions

Three of the eight bear markets listed above were not accompanied by economic recessions, according to FirstTrust. These included brief, six-month pullbacks in the S&P 500 of 21.8% in the late 1940s and 22.3% in the early 1960s. The stock market crash of 1987 is the most recent example, which was a 29.6% drop lasting only three months, according to First Trust.

Concerns about excessive equity valuations, with selling pressures exacerbated by computerized program trading, are widely recognized as the trigger for that brief bear market.

Bear Markets Before Recessions

In three other bear markets, the stock market decline began before a recession officially got underway. The dotcom crash of 2000 to 2002 also was spurred by a loss of investor confidence in stock valuations that had reached new historic highs.

The S&P 500 tumbled by 44.7% over the course of 2.1 years, punctuated by a brief recession in the middle. Stock market declines of 29.3% in the late 1960s and 42.6% in the early 1970s, lasting 1.6 years and 1.8 years, respectively, also began ahead of recessions and ended shortly before those economic contractions bottomed out.

Some of the Nastiest Bear Markets (So Far)

The two worst bear markets of this era were roughly in sync with recessions. The Stock Market Crash of 1929 was the central event in a grinding bear market that lasted 2.8 years and sliced 83.4% off the value of the S&P 500.

Rampant speculation had created a valuation bubble—and the onset of the Great Depression, itself caused partly by the Smoot-Hawley Tariff Act and partly by the Federal Reserve's decision to rein in speculation with a restrictive monetary policy—only worsened the stock market sell-off.

The bear market from 2007 to 2009 lasted 1.3 years and sent the S&P 500 down by 50.9%. The U.S. economy had slipped into a recession in 2007, accompanied by a growing crisis in subprime mortgages, with increasing numbers of borrowers unable to meet their obligations as scheduled. This eventually snowballed into a general financial crisis by September 2008, with systemically important financial institutions (SIFIs) across the globe in danger of insolvency.

Complete collapses in the global financial system and the global economy were averted in 2008 by unprecedented interventions by central banks around the world. Their massive injections of liquidity into the financial system, through a process called quantitative easing (QE), propped up the world economy and the prices of financial assets such as stocks by pushing interest rates down to record low levels.

The Bottom Line

The most recent bear market was the result of a global health crisis compounded by fear, which initially triggered a wave of layoffs, corporate shutdowns, and financial disruptions. But markets recovered—as they always have over time. The methods for measuring the length and magnitude of bull and bear markets alike differ among analysts. According to criteria employed by Yardeni Research, for example, there have been 20 bear markets since 1928. The most recent bear market will almost certainly not be the last.