Rebounding From Market Corrections and Bear Markets

Key Takeaways

Stock market ups and downs occur daily for many reasons. When the percentage loss reaches a certain point, however, investors’ worries can spike. Here's what you need to know about those bigger market downturns.

Market Correction vs. Bear Market

How Long Do Corrections and Bear Markets Last?

On average, corrections have happened about every two years and lasted a few months. However, they can take place more or less frequently.

Bear markets have happened less often than corrections but tended to last longer. Some of the most memorable bear markets include the Great Depression, the dot-com bubble in 2000 and the Great Recession of 2007-2008.

The average length of bear markets over the last 75 years is 11 months. One of the shortest bear markets lasted 33 days. It began in February 2020 in response to COVID-19 pandemic lockdowns across the world.

Average Length of Bear Markets and Market Corrections

^{Data from 1/1/1949 to 12/29/2023. Source: FactSet and American Century Investments. Past performance is no guarantee of future results.}

Why Markets Decline

Corrections can occur when an asset or an entire market’s prices seem overvalued. Many investment professionals expect corrections to occur and believe they may help bring stock values back to normal.

Unexpected news and events can also shake investors’ confidence in businesses’ abilities to meet their corporate goals and earnings forecasts. A market sell-off and bear market can take hold when the impact seems far reaching and longer lasting.

What Happens After Bear Markets?

While no one can accurately predict when bear markets occur, history shows that markets have recovered after periods of declines—and even rewarded those who stayed invested.

Bear Markets Through History and Their Recoveries

^{The table above shows all of the bear markets since 1950, as defined by Standard & Poor’s using the S&P 500® Index. The returns are price returns only, not total returns, and thus do not include dividends. Past performance is no guarantee of future results. Thus, the table should not be taken as an implication of future returns. Rather, it should serve as a reminder of the past resiliency of U.S. financial markets.
Sources: FactSet; American Century Investments.}

Bear Markets, Inflation and Interest Rates

While every bear market has unique reasons behind its arrival, inflation and interest rates can contribute.

Rising Inflation Rates

Rapidly rising inflation rates make it more difficult to determine what corporate earnings or consumer buying power will be. What’s more, people worry about the Federal Reserve's ability to control inflation without slowing economic growth too much. Learn more about how inflation affects the market.

Rising Interest Rates

Interest rate increases can lead to bear markets. If borrowing costs go up, people and businesses may spend less money. This can hurt the economy, lower company profits and decrease stock prices. Learn more about the effect of interest rates on bonds.

Tips for Getting Through Market Downturns

Watching markets go down can be stressful. However, if you are still a ways off from needing to use your money, keeping it invested for longer increases your chances of achieving your long-term goals.

As shown below, trying to time when to buy and sell investments can lower your returns substantially.

Impact of Missing the Best Days in a Market Rally

Jumping In and Out of Stocks May Cost You

^{Source: FactSet. Growth of $10,000 in the S&P 500® Index. Data from 01/01/1999 – 12/31/2023. The index does not reflect fees, brokerage commissions, taxes or other expenses of investment. Investors cannot invest directly in an index. Past performance is no guarantee of future results.}

How Holding Bonds to Maturity May Aid Bond Values

The farther away a bond is from its maturity date, the more its price can swing. As the maturity date nears, a bond’s price becomes less volatile as it moves toward par. Investors who sell a bond before it matures may get a far different amount than its par value, explains the Securities and Exchange Commission .

Bolting From Bonds Too Early May Cost You

Percentage of Time Bonds Increased in Value Over Each Time Period

^{A buy-and-hold strategy with bonds may be beneficial. Bonds are represented by the Bloomberg U.S. Aggregate Bond Index. Source: Ibbotson Associates. Data from 01/31/1976 – 12/31/2023. Past performance is no guarantee of future results.
The indices do not reflect fees, brokerage commissions, taxes or other expenses of investment. Investors cannot invest directly in an index.}

Bear Market Investment Strategies to Consider

During market downturns, some investors may feel loss aversion—they want to sell their investments instead of waiting for prices to rise again. But doing so may result in greater losses.

Selling when the market is low locks in losses—you no longer have the opportunity for those holdings to rebound. Also, having fewer stocks in your portfolio means you may not be able to recover some losses when the market improves.

A “precommitment strategy” can help you keep emotions in check and stay focused on your long-term goals in times of stress. Making dollar-cost averaging¹ a part of your precommitment strategy can help keep you invested during tough market conditions. It involves automatically investing the same dollar amount at regular intervals.

When the market goes down, your money buys more investments at cheaper prices. When the market goes up, you buy a lower number of investments at higher prices. Over time, dollar-cost averaging may lower the average cost of your investment.

Another important factor is diversification. This means spreading out your investments so that if one doesn't do well, another might succeed. This does not mean that a diversified portfolio never loses money. Rather, a mix of investments that react differently to market changes may provide more stable returns.

Finally, remember that investing is a long-term strategy. Historically, the market has tended to be more bullish than bearish. Concentrate on your long-term goals instead of worrying about market trends. This can help you navigate through the fluctuations more effectively.

For those close to retirement or other major financial goals, it may be a good time to reevaluate your portfolio’s level of risk. A financial professional can help you figure out if your investments are aligned with your goals.