History Shows Investors Who Buy During Bear Markets Will Likely See Huge Gains

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Stocks have been flirting with correction territory in recent months–and though the tech-heavy Nasdaq Composite dipped into a bear market last week, historical data shows that investors should look past market volatility, with experts urging investors to buy the dip on the market’s recent selloff.

The Nasdaq on average gains 22% in the year after falling into a bear market.

Richard Drew/ASSOCIATED PRESS

Key Facts

While the tech-heavy Nasdaq Composite has rebounded somewhat in the last week, the index dipped into bear market territory on March 14—at its low point down more than 20% from its peak last November.

Investors can never be sure whether a down market will turn out to be merely a bump in the road or a full-fledged recession, but historical data shows that those who buy in bear markets tend to be rewarded—with stocks often roaring back over one-, three-, five- and ten-year periods.

“Buying when stocks are in a bear market is generally a good strategy,” Ben Carlson, director of institutional asset management at Ritholtz Wealth Management, recently pointed out in his blog, “A Wealth of Common Sense.”

His data shows that since the start of a bear market, the Nasdaq has on average returned 22% after one year, 52% after three years, 87% after five years and a whopping 328% over ten years.

Last week’s rally “reflects the willingness of investors to shift to a ‘glass-half-full’ mindset,” says Nationwide’s chief of investment research, Mark Hackett, who adds that “markets are now showing favor to the fundamentals,” which should “set the stage” for an upcoming rally.

JPMorgan Chase is among major investors that believes this year’s market “still has upside,” and it recently noted stocks could see a 10% rally from current levels despite ongoing uncertainty from the Federal Reserve’s rate hikes and Russia’s invasion of Ukraine.

Crucial Quote:

“I know every correction feels like it’s going to be the end of the world, but most of the time the world does not in fact come to an end,” Carlson said in his recent note. “Even if you have to eat some further losses, buying stocks after they have already fallen 20% has led to nice returns historically.”

Surprising Fact:

During the Nasdaq’s last two bear markets starting in 2018 and 2020, respectively, stocks rose 37% and 73% the following year, while the index is also up 235% since the global financial crisis in 2008.

Key Background:

There could be an “upside surprise” ahead for U.S. economic growth, even as the Federal Reserve begins aggressively raising rates to combat surging inflation and the Russia-Ukraine conflict continues to weigh on markets, predicts Moody’s chief economist Mark Zandi. “Despite all the economy has had to deal with, odds are that the current economic recovery will evolve into a self-sustaining expansion,” which means that the economy will return to full employment, he predicts. All of this still critically depends on whether the Federal Reserve is able to quickly normalize rising interest rates without undermining the economic recovery, however: “Policymakers now need to work quickly—though not too quickly,” Zandi says. “No wonder recession and stagflation risks are so uncomfortably high.”

What To Watch For:

“As long as Russia continues to pursue its invasion of Ukraine, recession and stagflation will be serious threats,” Zandi says. If the European Union follows the United States in banning Russian oil imports, for instance, oil prices would spike even higher, to around $150 per barrel, and U.S. gas prices would approach $6 per gallon, Zandi warns.

Further Reading:

Stocks Jump As Investors Prepare For Bigger Rate Hikes To Fight Inflation (Forbes)

Dow Gains Nearly 300 Points As Stocks Wrap Up Best Week Since November 2020 (Forbes)

Analysts Reveal Their Top Stock Picks To Beat Stagflation And Outperform Choppy Markets (Forbes)

Federal Reserve’s Long-Awaited Rate Hike Is Here: Powell Announces 0.25% Increase (Forbes)

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