Bull Markets, Bear Markets, and Recoveries

Why this matters

Every long-term investor will live through several bear markets and several bull markets. How you behave in each one can matter more than anything you choose to buy. This lesson looks at what they are, what history shows about how long recoveries take, and what to do, and not do, in each.

Definitions

The SEC's investor education site describes a bear market as a time when stock prices are declining and sentiment is pessimistic, generally when a broad market index falls 20% or more over at least two months.¹ A bull market is the reverse: rising prices, optimistic sentiment, and generally a rise of 20% or more over at least two months.²

The 20% line is a convention, not a law of nature. A 19% fall isn't meaningfully different from a 21% fall. What matters is how deep a decline goes, how long it lasts, and whether you're forced to sell during it.

How deep, and how long

Part 5's Drawdowns and the Math of Recovery measured major US declines using yearly returns, including dividends. Here they are again, with one more example: the Nasdaq Composite, an index heavy in technology companies, through the dot-com crash.

Decline	How far it fell	Back above the old high
S&P 500, 1929 to 1932	−64.8%	By the end of 1936
S&P 500, 1973 to 1974	−36.5%	By the end of 1976
S&P 500, 2000 to 2002	−37.4%	By the end of 2006
S&P 500, 2008	−36.5%	By the end of 2012
S&P 500, 2022	−18.0%	By the end of 2023
Nasdaq Composite, March 2000 to October 2002	−77.9%	April 2015

S&P 500 rows: yearly total returns from Damodaran's data, measured from year-end to year-end, so the true peak-to-bottom falls were deeper.³ Nasdaq row: daily closing prices, which leave out dividends. The index closed at 5,048.62 on March 10, 2000, fell to 1,114.11 on October 9, 2002, and first closed above its old high on April 23, 2015.⁴

Two lessons stand out. First, recoveries for the broad market have taken years, not weeks, and have depended on holding on and reinvesting dividends. Second, the less diversified the market, the worse the outcome could be: an index concentrated in the most popular sector of its day took more than 15 years to recover.

The rest of this lesson is for members

Still to come in this lesson: Behaving well in a bear market, Behaving well in a bull market, the key takeaways, and 2 quiz questions with explanations.

Membership opens every lesson in the curriculum, the capstone projects, the interactive tools, and the members-only channels in the Hyperion Entities Discord. The first lesson of every module stays free.

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