When Will The Bear Market End?

When Will The Bear Market End? As Q3 came to a close, the S&P 500 had declined 23% since the start of the year, marking a bear market.

The market is considered in “bear territory” when there’s a prolonged drop in investment prices — typically when a broad market index, like the Dow Jones, falls by 20% or more from a recent high.

Investor pessimism and declining investor confidence are two common characteristics of a bear market. During a bear market, investors don’t pay much attention to good news and tend to focus on the bad. This leads them to keep selling quickly, which pushes prices even further.

When Will the Bear Market End?

The first question most investors have when the market has entered bear territory is, “how long is this going to last?”

On average, bear markets last for 289 days.

There have been 27 bear markets in the S&P 500 alone since 1928, and 15 since 1945. That’s an average of one bear market every five years.

The Dow Jones bear market decline of 20% was reached on September 26th, 2022. The S&P entered bear territory on June 13th, 2022. The NASDAQ is also in bear territory after plunging nearly 30% in 2022.

It’s no secret that 2022 has been a rough year for stocks.

Amazon fell by nearly 45% from its mid-2021 high. Apple has fallen more than 28%, and Netflix was down a whopping 75%.

If we take the 289-day average for bear markets into account, the S&P bear market could end in March 2023, and the S&P 500’s could end in July next year.

Of course, like all things stock market, there is a ton of uncertainty around the bear market, and it’s impossible to predict when it will end for sure.

There are a couple of valuation indicators that have a strong history of calling bear market bottoms:

  1. The S&P 500’s Forward P/E Ratio
  2. The Schiller P/E

Let’s take a closer look at how these two valuations work.

The S&P 500’s Forward P/E Ratio

A forward P/E ratio divides the price of a security by Wall Street’s consensus forecast earnings for the upcoming fiscal year instead of measuring trailing earnings over a 12-month period like a traditional P/E ratio.

The S&P 500 has experienced several sizable pullbacks since the 90s, including:

  • The dot-com bubble
  • The 2008 housing market crisis
  • The Covid-19 crash

The S&P 500’s forward P/E ratio has consistently found a bear market bottom between 13 and 14 over the past decade, with the exception of the 2008 crash.

As of Friday, September 23, 2022, the S&P 500’s forward P/E ratio was 18.9.

If the history of the S&P 500’s Forward P/E ratio echoes again, a significant decline in the forward P/E ratio is still required before this bear market reaches a trough.

The Shiller P/E

The Shiller P/E, which examines inflation-adjusted earnings over the past decade, has an impressive track record of calling bear markets.

There have only been five recorded instances of the Shiller P/E ratio exceeding and holding a reading of 30 since 1870. Every time this happened, the outcome was a bear market.

Considering these two leading valuation indicators, we can deduce that the S&P 500’s bear market bottom is likely between 2,939.12 and 3,337.03.

After falling to a two-year low on September 27th, the S&P 500 touched a session low of 3,623.29, meaning the bottom could be near. But, some financial experts worry that with the Fed’s plan to keep increasing interest rates will lower investor confidence, and the market will continue to be weak and stay in bear territory.

Investing in a Bear Market

The good news about a bear market is it’s an excellent time for investors to buy stocks on sale. Now is a good time to diversify your stock portfolio by purchasing a wide assortment of dividend-paying stocks and bonds, which are an attractive investment during stock market volatility and high periods of inflation.

While a bear market is certainly a bit jarring for any investor. It’s important to realize they happen only a minority of the time. For example, from 1928 to 2020, they accounted for only 22% of market history. So, instead of panicking and feeding into the fear, investors should make smart investment decisions.

During a bear market, investors should also consider investing in sectors that perform well during recessions, like consumer staples and utilities.

Also, keep your focus on the long-term. As scary as a bear market can seem, it’s not going to last forever. So instead of panic-selling, use this market downturn as an opportunity to beef up your investment portfolio and stay the course. It’s not easy to listen to headline after headline declaring disaster in the stock market, but the smartest thing you can do is remain calm and weather the storm.

What Do The Best Investors Do?

If you’re not sure where to turn, Stanley Druckenmiller is worth paying close attention to. He has an exemplary track record; some reports claim he has only ever had one losing year on record, others claim he’s had none. Either way, it’s worth noting what he’s buying.

And his portfolio has an interesting collection of positions. As you might expect in an inflationary environment, healthcare, utilities and energy companies feature prominently.

In healthcare, he has got holdings in Eli Lilly and Moderna. In the energy sector, he holds Chevron, just like Warren Buffett. And in the utility sector, he holds Edison.

Perhaps most surprisingly, his largest holding is Coupang, an e-commerce company in South Korea. Number two on his list by weighting is Microsoft. 

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