We define a bear market as an episode where US large-cap stocks fall by at least 20% from peak to trough. But rather than focus only on the peak-to-trough drop time period, or the drawdown period, we also stress the importance of considering how long it takes for stocks to register another all-time high. After all, the time under water—when markets are struggling to recover from their losses—represents the period in which you may be forced to lock in losses.
A big percentage change for one asset class may represent a relatively minor move for another. So while we use US large-cap stocks as the basis for defining bear markets, this is only for clarity. Well-diversified portfolios—which include global stocks as well as fixed income—are structurally designed to protect against the most painful parts of equity bear markets.
With this in mind, let’s look at US large-cap stock statistics for equity bear markets since World War II in order to evaluate what market cycles look like using our framework.