The Bear Market Has Almost Been Erased. Here’s What Comes Next.

The current proximity of the S&P 500 SPX, -1.20% to a complete recovery from its 2022 bear market losses is noteworthy. The benchmark U.S. stock index, with dividends reinvested (total return), is now merely 2.0% below its January 2022 all-time high. A positive week in the stock market could potentially propel it to surpass that peak.

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If this scenario unfolds in the near future, it would mark one of the quickest recoveries in history from the 2022 bear market. Less than 10 months have elapsed since the S&P 500 hit its bear market low on October 12 of last year.

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However, it is essential to recognize that the speed of this recovery should not solely determine the market's future prospects. Swift recoveries do not necessarily imply better subsequent stock market performance compared to longer recoveries.

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To arrive at this conclusion, an analysis was conducted on all bear markets since 1900, utilizing data from the calendar maintained by Ned Davis Research. The recovery time for the U.S. stock market to exceed its level at the beginning of each bear market was calculated. Subsequently, correlations were measured between this recovery time and the stock market's performance over one, two, and three years following that recovery.

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The results did not demonstrate any significant statistical relationships. Occasionally, a rapid recovery, such as the one observed after the February-March 2020 bear market (lasting just five months), was followed by robust market performance. Conversely, the market also experienced excellent performance following the four-year recovery from the 2007-2009 Global Financial Crisis.

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This outcome is expected, considering the stock market's efficiency. An essential feature of market efficiency is its forward-looking nature. The market's performance in the coming months is contingent on whether the news will be better or worse than current expectations, rather than being heavily influenced by its past performance.

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Suppose a quick recovery time did indeed increase the likelihood of strong subsequent performance. In that scenario, traders would flock to purchase stocks, leading to higher prices and ultimately diminishing the market's expected future returns to an average level.

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Therefore, while we can appreciate the recent strength of the stock market, it is crucial to remember that celebration alone should not form the basis of an investment strategy. As investors, our primary focus should remain on analyzing whether the news is unfolding better or worse than anticipated. This approach ensures a sound and informed decision-making process.

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