Previous Nasdaq bear markets have differed significantly in both intensity and duration.
It isn’t fun losing money. Unfortunately, that’s exactly what’s happening for a lot of investors these days — especially those who own once high-flying growth stocks.
The Nasdaq Composite Index (^IXIC -3.52%), which includes many of those growth stocks, is currently down 24% from its high set in the fourth quarter of 2021. When will the Nasdaq bear market end? Here’s what history shows.
Bears of the past
Let’s first address what a bear market is. Not every downturn qualifies. Only declines of at least 20% from the previous high meet the commonly accepted definition of a bear market.
With this in mind, there haven’t been many bear markets for the Nasdaq Composite Index so far. This index was created in 1971. It includes all of the stocks listed on the Nasdaq exchange — more than 3,000 in total.
The above chart doesn’t go back far enough to show the earliest Nasdaq bear markets. In 1973, the Nasdaq Composite Index plunged into a steep decline of close to 60%. It took around four years for the index to emerge from its bear market during this period of economic malaise.
In early 1982, another Nasdaq bear market occurred after the U.S. economy entered into a recession in the latter months of the previous year. By mid-summer of 1982, the Nasdaq Composite Index officially exited bear market territory.
The next Nasdaq bear market resulted from the unexpected stock market crash of 1987. Programmatic trading by computers exacerbated the stock sell-off. The Nasdaq Composite Index didn’t fully erase its losses until June 1989. However, the index recovered enough to end the bear market in March 1988 — roughly five months after the bear market began.
Bears reared their head yet again soon afterward. Another U.S. recession began in July 1990. Within a few months, the Nasdaq Composite Index was in another bear market. By January 1991, the bear market was over. The recession ended a couple of months later.
Nasdaq stocks skyrocketed throughout most of the 1990s. However, there was another brief Nasdaq bear market in the second half of 1998. The Nasdaq Composite Index fell more than 20% in August of that year. It soon recovered enough to move out of bear territory, only for the bear market to quickly resume. But by October 1998, a rebound was well underway.
In early 2000, the worst Nasdaq bear market ever began. By mid-October of 2002, the Nasdaq had plunged more than 75% as the dot-com bubble burst. When the economic crisis occurred in 2008, the Nasdaq Composite Index still hadn’t recovered. This nasty and extended bear market didn’t truly end until November 2013.
The only Nasdaq bear market after that point other than the current one came in early 2020 with the coronavirus-fueled sell-off. This bear market, though, lasted only a few weeks.
Lessons learned
Probably the most important lesson we can learn from previous Nasdaq bear markets is that they differed significantly in intensity and duration. Which historical precedent is most similar to the current Nasdaq bear market? I think we need to look at the causes of the previous downturns.
My view is that we can rule out the Nasdaq bear markets of 1987-1988, 2000-2013, and 2020 as good parallels for today. The current sell-off isn’t primarily due to programmatic trading, a dot-com bubble, or COVID-19 concerns. However, there are some similarities between the current Nasdaq bear market and those of the 1970s, 1982, and 1990-1991.
Skyrocketing oil prices and rising inflation were big concerns after the OPEC oil embargo of 1973. The recession and bear market of the early 1980s resulted mainly from the Federal Reserve hiking interest rates to fight inflation. Likewise, the recession in the early 1990s was due in large part to high oil prices and the Fed’s actions.
The World Bank is warning about the possibility of stagflation (a combination of stagnant economic growth and high inflation) that brings to mind the 1970s. However, my hunch is that the current Nasdaq bear market will be more along the lines of the bear markets experienced in the early 1980s and early 1990s.
I think the Fed is as determined to control inflation as it was during those periods. The job market is much stronger now than it was in the 1970s. Also, rising oil prices are largely due to reduced production during the brunt of the COVID-19 pandemic shutdowns combined with increased demand now and the Russian invasion of Ukraine. The situation isn’t nearly as bleak for oil prices as it was after the OPEC embargo.
How long?
If my take is on target, the current Nasdaq bear market won’t be an extended one that lasts for years. Instead, it could be possible that we see a solid rebound by 2023 and perhaps even sooner.
Perhaps the most important implication, if this is the case, is that selling all your stocks would be ill advised. Actually, now could be a great time to buy shares of companies trading on the Nasdaq that have strong underlying businesses and solid growth prospects.
Regardless of how long the current Nasdaq bear market lasts, investors will again make money and have fun sooner or later. That’s something history clearly shows.
