Persistent economic concern and volatility continues to plague markets and threaten a second straight year of decline. While many investors may feel best suited to pull their money out of the market in this environment, historical cycles suggest that bear markets are typically short lived and staying invested in a diversified portfolio through the downturns is likely still the best approach.

Stock market bull and bear cycles
S&P 500 price index, recessions are shaded, 1956–present

Chart showing stock market bull and bear cycles using the S&P 500, from 1956-February, 2023

Note: Bear markets are 20% declines in price from prior peaks. Bull markets begin at each market bottom.
Source: Clearnomics, Standard & Poor’s, Principal Asset Management. Data as of February 7, 2023.

Despite recent outperformance, with the possibility of a recession still at the forefront of many investors’ minds, some may be tempted to withdraw from this market. Yet, while downturns can indeed be difficult, history shows that they are often shorter-lived than bull markets.

On average, bear markets since World War II have lasted 14 months and resulted in a market decline of 36%. In contrast, the average bull market lasts 5 years, 9 months and returns 192%. While the Global Financial Crisis (GFC) did lead the S&P 500 down 57% and lasted 16 months, once the market troughed in early 2009, it took just seven months to rise back 57%. Furthermore, the ensuing bull market lasted almost 11 years and delivered 401% of return for the S&P 500! Staying invested, even through the GFC, would have duly paid back.

Investors can reduce portfolio volatility by maintaining proper diversification, as assets rarely all move in the same direction during challenging market environments. Even last year, when it seemed that all broad indices were down, commodities returned over 15%. This year, while economic weakness likely means drawdowns for equities, it should spell good news for fixed income—particularly as further rate hikes should be limited.

Historical cycles, even recently, show that staying invested through the market cycle, in a diversified portfolio, is typically the best investment approach.


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