We’ve written during the first few months of the year about the challenges affecting pensions; inflation, supply chain issues and the ongoing war in Ukraine among other things. This combination of factors is driving down market prices, which you’ve probably seen reflected in the value of your pension pot.

Whilst the current market downturn is unwanted, it’s not completely unexpected. It’s normal for the value of your pension to go down as well as up each day as the markets fluctuate. Naturally, though, it’s most concerning when the markets, and typically the value of your pension too, appear to be trending downwards for a sustained period of time. The most severe kind of market downturn is referred to as a ‘bear market’.

Although the current outlook may continue to be rocky for the near term, there’s also reason to be hopeful that pension balances will rise again. In order to understand why we see the silver lining, it’s helpful to take a step back and see what’s happened to the markets historically. We’ll also describe some of the things you can do to ensure as far as possible your retirement savings are protected.

What happened to the markets in May?

May broadly continues the global market downturn.

In the UK, the FTSE 250 fell just over 2%.

Source: Google

In the US, the S&P 500 fell nearly 5%.

Source: Google

What is a bear market?

When the value of the markets goes down it’s generally a reflection of investors’ more pessimistic sentiment towards current economic conditions, believing that economic growth is slowing. Investors tend to react by protecting more of their money by investing in traditionally ‘safer’ types of assets such as gold and traditionally bonds. As investors sell their company shares this drives down the prices of these stocks and therefore the cumulative value of investment funds such as a private pension.

Although there isn’t a strict definition of when we’re considered to have entered a bear market, one is generally acknowledged when the value of company shares has fallen by at least 20% from their most recent high, over a period of at least two months.

You’ve no doubt seen the value of your investments fall in recent times, but you’re probably wondering if this means we are now in a bear market? Let’s take a brief look at the recent performance of some of the main markets.

How big is the current market decline?

The US S&P 500 reached levels very close to that 20% threshold on 20 May, down 18.7% this year. In fact, it briefly crossed into bear market territory before ultimately closing up at the end of the day’s trading. However, the US Nasdaq 100 is currently in a bear market, having dropped by 30% from its last high point in November 2021. In China, the SSE Composite Index has fallen 14% since the start of the year. By comparison, the UK’s FTSE 100 has fared better, up about 0.5% overall this year, but some market watchers believe it’s only a matter of time before it sees a sustained bear-like decline too.

The overall picture given of the major global markets is certainly characterised by a number of bear market-like features without signs that recovery is immediately around the corner. Though we’re still in the midst of a market downturn, it’s worth seeing how the current market situation compares to the bear markets of the past.

Bear markets of the past

It’s important to recognise that not all bear markets are as severe as others. At the time of writing, there have been 14 bear markets since the end of WW2 all with varying degrees of duration and fall in values. Let’s take a look at the last three bear markets.

2020

Prior to this year, the most recent bear market was in 2020 when global markets dropped by about 34%, following worries about the effects of the COVID-19 pandemic on the global economy. Whilst this was the fastest decline into a bear market it was also the shortest in history, lasting just 33 days.

2007 - 2009

One of the worst bear markets since WW2 came in 2007 following the housing market crash, when there was a drop of more than 50% over the following 18 months in what came to be known as the Great Recession.

2000 - 2001

Right at the turn of the 20th century, the infamous ‘dot com bubble’ market crash saw around 35% wiped off stock valuations as a bear market took hold between March 2000 and September 2001.

S&P 500 bull and bear markets since 1956

Even in the midst of a sustained market downturn, such as we’re in now, the markets sometimes see an uptick in the value of company shares, in what is known as a bear market rally.

A bear rally was seen in the S&P 500 on 23 May as it jumped 1.8%. Similarly, the DOW grew by 2% which came off the back of seven consecutive weeks of decline in stock market values.

However, such rebounds tend to be short-lived and don’t necessarily signal the end of the bear market. Of course, what everyone wants to know is will the bear market end and, if so, when?

As with all investments, past performance is not indicative of future performance and you may get back less than you start with.

How long will the bear market last?

Unfortunately, there’s no defined time when a bear market will end but it’s helpful to know that every bear market in history has eventually come to an end.

The nature of the markets is cyclical, for every bear market we enter, a bull market (characterised by a sustained period of rising market prices), follows. Thankfully, bear markets are typically much shorter-lived than bull markets with an average duration of roughly 10 months and a recovery from bear market values in about 15 months. In contrast, a bull market may last around three years.

A bear market typically ends when market values bottom out and no longer continue to fall. Investors’ sentiment becomes more positive and they take the opportunity to buy company shares at lower prices. If your pension is made up of any company shares your investment will also take advantage of these lower values. As shares are more affordable, your investment is able to buy more and potentially see greater returns during a market recovery.

What should you do during a bear market?

We understand that seeing your investments decrease in value can be unsettling and you may be tempted to withdraw your investments or consider switching to an alternative provider. However, this may not be the best option for the value of your investments.

It’s important to remember that even when the value of an investment drops you only lock in the loss if you actually withdraw from your funds. The performance of our plans has shown the ability to bounce back from previous market downturns. Therefore, we recommend finding ways to allow your pot time to grow again.

For those at or nearing retirement here are a few ways you can help protect your pension income.

Delay or withdraw less from your pension

Delaying or withdrawing less from your pension means that the money you leave invested will have more time, and therefore opportunity, to grow in value again, once markets stabilise.

Use other sources of income

If possible, look to use any other sources of income you may have, particularly those which may not grow as much as your pension in the long term such as personal savings. Utilising other sources of income such as savings or a cash ISA gives any investments you have in stock markets the opportunity to see out the bear market period and recover.

Consider increasing your contributions

If you’re able to, then adding to your pension pot could allow you to grow your pension in the long term. As the value of company shares is lower during a bear market your money is able to buy an increased number of shares at a more affordable rate with the potential for greater returns.

Delay your retirement

Once you retire and start withdrawing from your pension you will be locking in the dip in the value of the money you withdraw. Though retiring later is not what most people hope to do, it’s another option that can allow your retirement savings time to ride out the market decline.

Looking to the past gives us hope for the future

As we’ve explored, bear markets are nothing new, some are deeper and last longer than others, but global markets have recovered from every bear market in history without exception. Moreover, the value of company shares has not only recovered but typically goes on to reach new highs.

Even the biggest market crash since the Great Depression, the 2008 global financial crisis, was followed by the longest period of sustained growth in market history until the coronavirus pandemic struck markets in 2020.

It’s important to keep a long-term view of pension performance. Allowing time for your investments to ride out the temporary economic storms should pay dividends (literally), by the time you come to retire.

So, while the situation may continue to be rocky for now, the past gives us hope for the future.

Key takeaways

• Bear markets are normal and will come to an end
• The average duration of a bear market is 10 months
• Bull markets typically last longer than bear markets, and the gains made during them are often larger than the losses in a bear market.
• If possible, avoid withdrawing from your pension to allow time for your investments to recover and grow again.

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.