A bear market is defined as the index closing at least 20 percent down from its previous high close. There have been six bear markets for the S&P 500 over the past fifty years, according Yardeni Research. Since bear markets tend to occur about every three and a half years on average, we are a few years overdue.
Taking a look at where we are today, the US stocks are now in the longest bull market on record. Further, the S&P 500 has nearly quadrupled since bottoming on March 9, 2008. This long lasting growth feels much deserved, especially after the painful impact of the Great Recession, which began in December 2007 and lasted until June 2009. At 18 months, it was the longest of any recession since World War II, according to the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), and it is widely considered the worst contraction since the Great Depression.
While a recession in the near future may be unavoidable, the good news is that recessions don’t last forever – on average, only about a year. Still, while conditions remain positive, it’s time for a refresher on what causes recessions.
Since World War II, there have been three main culprits: (1) an external “shock” to the economy, such as the early 1970’s OPEC oil embargo or the first Gulf War; (2) the bursting of an asset bubble (think 2000 dot-com stock bust or the bursting of the housing and credit bubbles in 2008); or (3) an overheating economy that results in higher prices, which in turn prompts the Fed to raise interest rates. (Fun fact: most economists believe that the next recession will likely be caused by #3.)
Just because the current expansion and bull market have been ongoing for the past nine years, it does not mean that all business will come crashing down imminently. However, as investors, we need to manage our financial lives knowing that both a recession and a bear market WILL OCCUR, regardless of the exact timing.
And while these relatively good times feel virtuous, they can also breed complacency.