How Long Will The Next Bear Market Last

by: Eric Parnell, CFA


It has been nearly nine months now since the U.S. stock market has set a new all-time high.

The next bear market may already be well underway.

While much of the focus on the next bear market is the magnitude of the declines it may bring, it is also worthwhile to consider its potential duration.

While it may not feel this way, it has been nearly nine months now since the U.S. stock market has set a new all-time high. Since the last intraday peak on the S&P 500 Index (NYSEARCA:SPY) at 2134.72, stocks are down by more than -12% through Friday's trading. And the further stocks travel in time from this past peak, the more unlikely it seems that they will break out to new highs. Thus, the next bear market that so many have mentioned looming on the horizon may already be well underway. While much of the focus on the next bear market is the magnitude of the declines it may bring, it is also worthwhile to consider its potential duration.

A Seeking Alpha reader that I have enjoyed sharing many comments with over the years asked a great question in the comment section of one of my recent articles. I have included it below.

"You have made your point, that our market has reached into a bear market.

Now what I want to hear is , how long will it last ?"

Outstanding question, and one that warrants closer examination.

My expectation is that the next bear market will last longer, perhaps much longer, than the typical bear markets we have seen over time.

This leads to the next important question. Exactly how long is typical?

I will proceed with the following assumption. I am not of the opinion that the next bear market will be one where stocks creep across the -20% return line that many use to put a stamp on an official bear market. Instead, I believe the next bear market is one that could bring declines in excess of -30% or -50% or more. As a result, I will exclude from my historical analysis those bear markets that in reality were nothing more than glorified corrections at the time. Instead, I want to focus on the true historical bear markets, as I believe the next episode has the potential to rank among this group given the persistent issues associated with unserviceable debt, overinflated asset valuations and extreme policy measures already undertaken.

With this in mind, the following is the list of the major bear markets over the past 80 years.

September 1929 to June 1932 - 34 months

March 1937 to April 1942 - 62 months

May 1946 to June 1949 - 38 months

November 1968 to May 1970 - 18 months

January 1973 to October 1974 - 21 months

August 1987 to December 1987 - 3 months

March 2000 to October 2002 - 31 months

October 2007 to March 2009 - 17 months

While the bear market associated with the financial crisis was certainly traumatic, what is often overlooked is the fact that it ranks among the shortest of all major historical bear markets. The only exception was the 1987 stock market crash, but this would be considered an asterisked exception given that the entire bear market effectively took place over the course of a single trading day and was immediately followed by the dawn of market interventionist monetary policy measures by the U.S. Federal Reserve that have continued and have arguably helped to greatly contribute to the market environment that we are gingerly navigating today.

Reflecting back on the financial crisis period, the duration of the bear market at the time was likely accelerated a great deal by the fact that Lehman Brothers was allowed to fail in September 2008. The stock market implosion that followed in the aftermath sped up the washing out the system while at the same time compelled policy makers to engage extreme measures to rescue the global economy. Upon reflection, had policy makers not allowed Lehman Brothers to fail, we might have reasonably expected the stock market to have reached its final bottom during the summer or fall of 2010. This would have put the length of the financial crisis bear market more in line with historical averages of 30 to 36 months associated with past major bear markets.

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So if the financial crisis bear market was notably shorter than the major historical bear market average, why then would the next bear market end up being notably longer? For the same reason that the last bear market was so short, which is the expected relentless intervention of global central banks including the U.S. Federal Reserve.

If the U.S. stock market is indeed entering a sustained bear market phase, it is likely to be marked by periods of extreme declines. During these declines, particularly the further the market moves away from its previous peak, the more likely the Fed will be to try and intervene to stem these market declines. This will likely help inspire swift countertrend rallies as market participants get their hopes up that the blissful post crisis days when the market was seemingly uplifted endlessly by monetary policy stimulus will soon return once again. Except that it won't, because global central banks including the Fed have largely exhausted their monetary policy firepower to reverse a sustained stock market decline. Can they take actions to stem the bleeding at the margins? Absolutely. But given their likely inclination to try and step in and manage the market decline at any given point in time, they are likely to provide just enough juice to periodically lift the market to lower lows and over time only prolong the agony of allowing the markets to undergo the wash out cleansing process they so badly need to experience at this point.

Putting this all together, if a typical major bear market lasts 30 months on average from peak to trough, it is likely that the next major bear market will last much longer, perhaps twice as long or more, as the market's long overdue need to cleanse the system is resisted by repeated rounds of policy intervention to try and stop the bleeding along the way.

Only time will tell. But the positive associated with any such outcome is that the next major bear market is likely to bring us to the dawn of the next secular bull market in stocks. And this will be a prolonged period to celebrate in the markets for potentially decades to come. It's only a matter of getting to the starting line from here at this point.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. Gerring Capital Partners makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Gerring Capital Partners will be met.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.