Bear markets are notoriously nerve racking with every drawdown presenting its personal set of distinctive circumstances. But historical past exhibits that staying invested by volatility is usually essential to reaching long-term success. Because the saying goes, volatility is the value you pay for long-term efficiency. Even essentially the most extreme bouts of volatility haven’t stood in the way in which of success for buyers who maintained a long-term method to investing.
This publish gives information to assist buyers put bear markets in historic context and achieve confidence of their long-term funding plans. To do this, we analyzed 15 bear markets since 1950, utilizing the S&P 500 to check recessionary and non-recessionary declines throughout three key dimensions — throughout each drawdowns and recoveries:
Magnitude and Period of Drawdown
- Magnitude of non-recessionary bears is a shallower -22% in comparison with the median -35% drawdown felt when bear markets coincide with recessions.
- Period of non-recessionary bears averaged solely three months in comparison with 18 months for recessionary.
Financial and Fiscal Coverage Developments
- All of the recessionary bear markets occurred with an inverted yield curve.
- In the one yield curve inversion the place a recession was prevented, the deficit to GDP ratio elevated by 3% through the interval of fed tightening and curve inversion. This has additionally been true to this point in present yield curve inversion interval.
Funding Fashion Differentiation
- Low Volatility and Dividend kinds had been essentially the most resilient in drawdowns no matter whether or not recessionary circumstances had been current.
- Restoration efficiency in non-recessionary durations favored High quality and Development in comparison with Worth and Small Caps after recessionary bear markets.
Recessionary vs. Non-Recessionary
There are key variations in recessionary and non-recessionary bear markets.
The median drawdown for recessionary bear markets was -35%, about 50% deeper than non-recessionary bears. Non-recessionary bear markets are often brought on by short-term concern that the financial system is stalling or coming into a recession. And as constructive information emerges, the concern — and drawdown — subside. The extra 10% to twenty% drawdown appears to coincide with proof of recession lastly surfacing within the information, moreover supported by an additional 12 months of period because it digests the unfavorable information (not sentiment). Curiously, there was just one time in historical past that we’ve got skilled back-to-back, non-recessionary bear markets, and that was through the fiscally supportive Sixties.
Determine 1: Bear Markets by the Numbers
Disclosures: Please see appendix for definitions and citations.
Bear Markets Are likely to Run Deeper When Valuations Are Excessive
For our valuation measurement, we determined to make use of the CAPE ratio as a result of trailing 12-month earnings are extremely unstable throughout recessions, thus distorting the P/E ratio. For instance, the 92% drop in earnings in 2008 didn’t mirror long term views concerning what earnings had been prone to be 5 to 10 years sooner or later, which is the inspiration for point-in-time valuations.
We discovered valuation to be a horrible timing mechanism for each bear markets and recessions, however valuation did typically issue into the severity of a bear market — with lofty valuations extra typically related to extreme bear markets.
The hyperlink between the severity of the recession and the depth of the bear market is questionable at finest. For instance, the 2000s bear market began with excessive valuation that was lowered by nearly half by the point the market discovered a backside. Notably, the 2000s bear market stands out as a result of it had the smallest decline in actual GDP of all of the recessionary bears, but it produced one of many longest and deepest drawdowns.
One other instance of adjustments in valuation mattering to the severity of bear markets is the 1980 to 1982 drawdown. This was one of the extreme recessions and actual GDP declines. Nonetheless, the beginning valuation was low-cost, particularly by at the moment’s requirements, leading to a somewhat gentle recessionary bear market decline of -27%.
Determine 2: Change in Valuation Throughout Bear Markets
Disclosures: Please see appendix for definitions and citations.
Earnings and GDP Affect
We took Shiller’s S&P 500 Earnings and analyzed the variations between recessionary and non-recessionary bears. The median earnings decline throughout recessionary bears was usually unfavorable, corresponding with the shrinking financial system. Alternatively, non-recessionary durations typically had rising earnings.
One other attention-grabbing distinction between recessionary and non-recessionary bear markets is the place the market peaks and bottoms relative to earnings. Non-recessionary bear markets are inclined to peak and backside comparatively shut with earnings. Nonetheless, recessionary bears tended to backside prematurely of earnings by 9 months.
Determine 3: Change in Earnings Throughout Bear Markets
Disclosures: Please see appendix for definitions and citations.
Financial and Fiscal Coverage: Clues to Recession Threat
Fiscal and financial coverage additionally contribute to the severity of bear markets since they’ll affect the chance of recessions. The yield curve stays essentially the most dependable predictor over horizons higher than one 12 months, notes a Federal Reserve Financial institution of Chicago paper.
Fed mountaineering cycles are often the wrongdoer of yield curve inversions. We rely 11 mountaineering cycles leading to 9 yield curve inversions and eight recessions with corresponding bear markets. The present mountaineering cycle and yield curve inversion is excluded as a result of the cycle has not but accomplished with a yield curve steadily in a constructive sloping course for not less than two quarters.
The one time a yield curve inversion didn’t result in a recession was in 1966, when the Fed was elevating charges to battle inflation. On the identical time, fiscal coverage was expansionary, with the deficit-to-GDP ratio rising 3% as a consequence of simultaneous spending on the Nice Society applications (Medicare and Medicaid) and the Vietnam Warfare.
Nonetheless, authorities spending will increase to spice up development are sometimes adopted by a rise in costs, as we simply noticed post-Covid. In 1967, as inflation reaccelerated, the Fed started a second collection of charge hikes resulting in the recession and bear market of 1968 to 1970.
There are similarities at the moment. Financial coverage has been restrictive however has been offset by authorities spending with a 3% improve within the deficit-to-GDP ratio. If the aim of Congress and the Administration is to get the finances deficit again down to three% from its present 6% to 7% degree, we might want to scale back the deficit by roughly $300 billion per 12 months over the subsequent 4 years. This could equate to a 1% drag on GDP per 12 months, which might be development unfavorable within the brief time period however seemingly not recessionary by itself.
Whether or not the fiscal discount is completed by spending cuts, tax will increase, or tariffs is much less consequential than the instant math of a 1% discount in demand working by the financial system. This isn’t a press release on medium-to-longer-run fiscal technique’s influence on financial development.
Which Funding Kinds Maintain up — and When
Irrespective of the severity of the drawdown the market does get well. Nonetheless, which kinds you spend money on matter throughout each the drawdown and restoration durations. In Figures 4 to eight, we current a collection of quilt charts that recommend what buyers ought to contemplate proudly owning throughout and after each recessionary and non-recessionary bear markets.
It shouldn’t be a shock that in bear markets usually, extra conservative components reminiscent of low volatility and dividend yield outperform, and extra aggressive components like excessive volatility and development underperform. It additionally shouldn’t be a shock that this situation is reversed throughout market recoveries.
Determine 4: Fashion Extra Returns: Recessionary Bear Markets High to Backside
Disclosures: Previous efficiency isn’t any assure of future outcomes. All of the returns within the chart above are in reference to unmanaged, hypothetical safety groupings created solely for analytical functions. These are hypothetical kinds based mostly on describing traits. Please see appendix for definitions and citations. Extra Return is Annualized Return over the High 1000 Portfolio.
Determine 5: Fashion Extra Returns: Non-Recessionary Bear Markets High to Backside
Disclosures: Previous efficiency isn’t any assure of future outcomes. All of the returns within the chart above are in reference to unmanaged, hypothetical safety groupings created solely for analytical functions. These are hypothetical kinds based mostly on describing traits. Please see appendix for definitions and citations. Extra Return is Annualized Return over the High 1000 Portfolio.
One 12 months after a recessionary bear market, the main kinds — except for excessive volatility — are usually SMID and worth. In distinction, the sample following non-recessionary bear markets is markedly completely different: development and high quality have a tendency to guide. This makes intuitive sense, as non-recessionary bears are sometimes development scares somewhat than full financial resets, so market management doesn’t shift. These durations usually align with the later levels of the financial cycle, when development and high quality kinds traditionally outperform.
We restricted Determine 7 to at least one 12 months after the underside of a non-recessionary bear. This was a choice created from necessity as a result of roughly a 12 months and half to 2 years after a non-recessionary bear, the market tends to expertise a recessionary bear. One other indication that non-recessionary bears are mid cycle development scares.
Determine 6: Fashion Extra Returns: 1-Yr After Recessionary Bear Markets
Disclosures: Previous efficiency isn’t any assure of future outcomes. All of the returns within the chart above are in reference to unmanaged, hypothetical safety groupings created solely for analytical functions. These are hypothetical kinds based mostly on describing traits. Please see appendix for definitions and citations. Extra Return is Annualized Return over the High 1000 Portfolio.
Determine 7: Fashion Extra Returns: 1-Yr After Non-Recessionary Bear Markets
Disclosures: Previous efficiency isn’t any assure of future outcomes. All of the returns within the chart above are in reference to unmanaged, hypothetical safety groupings created solely for analytical functions. These are hypothetical kinds based mostly on describing traits. Please see appendix for definitions and citations. Extra Return is Annualized Return over the High 1000 Portfolio.
After we dove slightly deeper into the numbers throughout the complete cycle, we observed attention-grabbing tendencies. In Determine 8, we present market cycles after recessionary bear markets. Recessionary bears observe the financial cycle and have a special sample than non-recessionary bears. Unsurprisingly we see extra cyclical kinds reminiscent of worth and small measurement lead within the first 12 months of a brand new bull market. Worth and small proceed to guide, although at a extra modest tempo, within the second by fifth years of the brand new cycle.
Then, after the cycle reaches six years, we usually see a shift in management to the late cycle kinds like development and high quality. As development of the broad financial system moderates after years of financial and monetary impulse usually seen within the early cycle, development turns into extra scarce with much less firms capable of reveal development unbiased of the broad financial system. This offers high quality and development a double barrel impact late cycle, combining higher development charges with a number of enlargement (shortage impact).
Determine 8: Historic Hypothetical Fashion Returns: Recessionary Bear Market Cycles
Disclosures: Previous efficiency isn’t any assure of future outcomes. All of the returns within the chart above are in reference to unmanaged, hypothetical safety groupings created solely for analytical functions. These are hypothetical kinds based mostly on describing traits. Please see appendix for definitions and citations. Extra Return is Annualized Return over the High 1000 Portfolio.
In conclusion, if we keep away from a recession, we will anticipate the worst of the volatility to be over and for high quality and development to proceed to guide based mostly on historical past. If we inevitably tip right into a recession, we seemingly have decrease and longer to go together with low volatility, dividends and worth traditionally serving to scale back the ache. The next rebounds from recessions have been traditionally good occasions to rebalance into the small- and mid-cap components of the market.
This publish goals to supply buyers with historic information on bear markets to supply perspective and construct confidence in long-term investing. Bear markets are the value we pay for the outstanding compounding potential of equities. By higher understanding the place we’re within the financial cycle — and what kind of bear market cycle we could also be experiencing — buyers and advisors alike can use historic patterns to handle expectations, navigate uncertainty, and place portfolios for each resilience and restoration.
Appendix & Citations
Figures 1-3: Bear Market Knowledge Tables
- S&P 500 Index Ranges. FactSet, 2025.
- Blinder, Alan. 2023. “Landings, Delicate and Arduous: The Federal Reserve, 1965-2022.” Journal of Financial Views—Quantity 37, No 1—Winter 2023—Pages 101–120
- Federal Reserve Financial institution of New York. The Yield Curve as a Main Indicator. https://www.newyorkfed.org/analysis/capital_markets/ycfaq.html.
- Shiller, Robert J. On-line Knowledge: U.S. Inventory Markets 1871–Current and CAPE Ratio. Yale College Division of Economics, http://www.econ.yale.edu/~shiller/information.htm.
- Nationwide Bureau of Financial Analysis. US Enterprise Cycle Expansions and Contractions. https://www.nber.org/analysis/information/us-business-cycle-expansions-and-contractions.
- US Bureau of Financial Evaluation, Actual Gross Home Product [GDPC1], retrieved from FRED, Federal Reserve Financial institution of St. Louis; https://fred.stlouisfed.org/collection/GDPC1, Might 1, 2025.
- Kelley, David. 2019. Which Main Indicators Have Accomplished Higher at Signaling Previous Recessions? Chicago Fed Letter No. 425. Federal Reserve Financial institution of Chicago. https://www.chicagofed.org/publications/chicago-fed-letter/2019/425.
Figures 4–8: Quilt Charts and Market Cycles Chart
- Knowledge Supply: Compustat
- Calculation: Hartford Fairness Modeling Platform
Fashion and Time Interval Definitions:
- Worth: US High 1000 Shares high 30% based mostly on Composite Worth as outlined by a number of equally weighted valuation metrics to reach at an aggregated valuation metric. Valuation metrics embody P/E, EBITDA/EV, Working Money Circulate/EV, Income/EV, and B/P Yield (used solely in financials and actual property as a substitute to EBITDA/EV), then cap weighted.
- Low Volatility: US High 1000 Shares high 30% based mostly on a Composite Volatility rating outlined by a number of equality weighted volatility metrics to reach at an aggregated volatility metric. Volatility metrics embody 3 Yr weekly Beta and 6-month day by day Std Deviation, then cap weighted.
- Excessive Volatility: US High 1000 Shares backside 30% based mostly on a Composite Volatility rating outlined by a number of equality weighted volatility metrics to reach at an aggregated volatility metric. Volatility metrics embody 3 Yr weekly Beta and 6-month day by day Std Deviation, then cap weighted.
- Dividend: US High 1000 Shares high 30% based mostly on trailing 12month dividend per share divided by present share value, then cap weighted.
- High quality: US High 1000 Shares high 30% based mostly on Gross Earnings to Belongings, then cap weighted.
- Development: US High 1000 Shares high 30% based mostly on 5 Years Gross sales Development, then cap weighted.
- SMID: US Mid-sized & Small Cap shares representing the smallest 15% and 13% of shares respectively, excluding the very smallest 2% that are categorised as microcap, then cap weighted.
- Mega/Giant: US Mega & Giant Market Cap shares with Mega representing the biggest 40% and enormous cap representing the subsequent largest 30% of the universe, then cap weighted.
- High 1000: US High 1000 Shares, cap weighted.
Interval Definitions for Market Cycles Bar Charts:
- Recessionary Bear Markets
- Yr 1: The 12 months straight following a bear market interval. Years 2-5: Months 13-60 following the previous bear market. Yr 6+: The interval after month 60 till the subsequent bear market
- Bear Market: Any interval when the US Market dropped by 20% or extra with a corresponding recession
*It is very important observe that we outlined bear markets as -19% or higher declines from all-time highs, given the unusually great amount of -19% declines and shoppers rightly are as anxious to lose -19% as -20%.
