Any parent with young children hitting the road knows the inevitable question that will arise from the backseat: “Are we there yet?” And after hearing a negative answer, the follow-up question is almost always, “How long will it be before we there?’
I don’t think the majority of investors are childish. However, many of us ask the same questions that young children ask – except that the subject is the stock market instead of a car ride.
Some speculate that this could be the longest bear market in history. I do not think so. There probably not going to be a long bear market. Here are three compelling reasons why.
1. Most major indexes aren’t even in a bear market
There is one obvious argument against the existence of a historically long bear market. The reality is that most major indexes aren’t even in a bear market right now.
The definition of a bear market is when an asset falls 20% or more from its recent highs. The S&P 500 it is currently about 15% below its previous peak. The Russell 2000 the small-cap index is down approximately 14%. The Dow Jones Industrial Average is only about 7.5% below its previous peak.
Of course, Nasdaq Composite Index has been in bear market territory for months. But it’s incorrect to say the “stock market” is in a bear market when three of the top four US stock indices clearly are not.
2. Macroeconomic indicators are too positive
Could these other indices soon fall into bear markets? It’s possible. But even if it does, I wouldn’t bet on a long bear market. It’s just that the macroeconomic indicators are too positive.
To be clear, I am not saying that all macroeconomic indicators look great. For example, inflation remains higher than anyone would like. But recent reports seem to indicate that the Federal Reserve’s rate hikes are helping to keep inflation under control.
Unemployment is another key macroeconomic indicator. There is good news again. The US unemployment rate in December 2022 was a historic low of 3.5%.
Perhaps the US economy could enter a recession in 2023 and drag all the major indexes into a bear market. However, some economists believe that we may instead be in for a “slow cession” with an economic slowdown that is relatively mild.
The informal definition of a recession is when gross domestic product (GDP) falls for two consecutive quarters. Although similar declines occurred in the first two quarters of 2022, US GDP jumped 3.2% higher in Q3. The Fed currently forecasts fourth-quarter GDP growth of 3.5%. This trend certainly does not point to a sustained bear market.
3. History is against a prolonged bear market
Finally, history appears to favor investors. The S&P 500 has fallen 19.4% or more only seven times so far, including the big drop in 2022. Of the six times the S&P fell that much last year, it rebounded by at least 23 in the following year. 5%.
The bigger picture also looks encouraging. Between 1940 and 2021, the S&P 500 fell for 23 years. In 19 of the years following a decline, the index produced a positive return.
In the past, there have only been two S&P 500 bear markets that lasted more than two years. The first occurred between 1930 and 1932 during the Great Depression. The second was in 2000 and 2002, a period in which the dot-com bubble burst and the worst terrorist attack on US soil in history. Are we likely to experience conditions close to those that led to either of these two long bear markets? No.
The answer many parents give when their children ask while traveling how long it will be before they arrive is something like “it won’t be long”. That’s probably a good answer for investors wondering how long a potential bear market could last.