The U.S. stock market has experienced roughly 27 bear markets since the crash of 1929, though the majority of those occurred before 1970.
Since 1970, there have been approximately 10 bear markets, meaning investors have faced a severe downturn roughly once every six years over the past six decades.
The most recent bear market arrived in 2022, when the market fell approximately 25% from January through mid-October of that year, a decline that meets the standard definition of a 20% drop from a recent high.
Using simple historical averages, that timeline would place the next bear market somewhere within the next two years, though the market has never been predictable enough to follow such neat patterns.
The S&P 500 hit a fresh all-time high as recently as August 7, closing at 7,757, capping a nearly four-year bull run since the last bear market ended in late 2022.
Despite that bullish momentum, the Shiller price-to-earnings ratio, also known as the cyclically adjusted P/E or CAPE ratio, is now sitting at 42, a level that has historically preceded significant market declines.
The only time the Shiller P/E ratio climbed higher was in November 1999, when it peaked at 44, just months before a bear market that lasted approximately 546 days.
The 2000s delivered four separate bear markets, including a 2007 to 2008 collapse that erased 51% of market value and stretched over 400 days, according to an analysis by The Hartford Funds.
Investors looking to prepare their portfolios should start by identifying holdings with abnormally elevated P/E ratios, as those overpriced positions tend to suffer the steepest losses when markets turn south.
Diversification remains one of the most effective defenses, and investors should consider rebalancing away from growth stocks and large-caps toward value stocks, international equities, small-caps, and high-yield dividend stocks with strong, consistent earnings.
Vanguard’s current model portfolio recommends an allocation of 36% in U.S. stocks, 24% in international stocks, 28% in U.S. bonds, and 12% in international bonds, offering one benchmark for a more defensive positioning.
Exchange-traded funds can also serve as useful tools during turbulent markets, with actively managed ETFs offering portfolio managers the flexibility to adjust holdings in response to rapidly changing conditions.
Bear markets, for all their pain, historically present some of the best opportunities to acquire shares of high-quality companies at significantly reduced valuations, making patient, long-term investors the biggest beneficiaries of downturns.
