A lot has been written in the past year about the stock
market’s transformation to a bear market. This is generally considered to occur
when the stock market sustains a decline of 20 percent or more. Several of the
major stock indices passed the 20 percent mark while declining late last year
and early this year, although the recovery process has been underway for some
time now.
The specter of a bear market now looms large in investor psychology. Whereas stock market
setbacks throughout the 1990s were usually quickly erased by another upward surge,
the declines of the past 14 months have not been as easily recovered. Many investors,
especially those who held an appreciable portion of their portfolios in technology issues,
are studying alternate strategies. They are also pondering how long a time frame they
should allow for the stock market to correct itself.
The chart below indicates that the Standard & Poor's 500 Index (generally considered to
be representative of the stock market) has endured 21 declines of greater than 20 percent
since 1929.
| Decline Began |
Decline Ended |
Extent of Decline |
Catch-up Date |
| 09/07/29 |
11/13/29 |
44.67% |
09/22/54 |
| 04/10/30 |
12/16/30 |
44.29% |
12/09/52 |
| 02/24/31 | 06/02/31 | 32.86% | 02/10/37 |
| 06/27/31 | 10/05/31 | 43.10% | 04/06/36 |
| 11/09/31 | 06/01/32 | 61.81% | 07/03/33 |
| 09/07/32 | 02/27/33 | 40.60% | 05/26/33 |
| 07/18/33 | 10/21/33 | 29.75% | 10/22/35 |
| 02/06/34 | 03/14/35 | 31.81% | 09/10/35 |
| 03/06/37 | 03/31/38 | 54.50% | 02/02/46 |
| 11/09/38 | 04/08/39 | 26.18% | 02/13/45 |
| 10/25/39 | 06/10/40 | 31.95% | 07/08/44 |
| 11/09/40 | 04/28/42 | 34.47% | 03/29/43 |
| 05/29/46 | 05/17/47 | 28.78% | 06/09/50 |
| 06/15/48 | 06/13/49 | 20.57% | 01/07/50 |
| 08/02/56 | 10/22/57 | 21.63% | 09/24/58 |
| 12/12/61 | 06/26/62 | 27.97% | 09/03/63 |
| 02/09/66 | 10/07/66 | 22.18% | 05/04/67 |
| 11/29/68 | 05/26/70 | 36.06% | 03/02/72 |
| 01/11/73 | 10/03/74 | 48.20% | 07/17/80 |
| 11/28/80 | 08/12/82 | 27.11% | 11/03/82 |
| 08/25/87 | 12/04/87 | 33.51% | 07/26/89 |
| 03/24/00 | 04/04/01 | 27.77% | Not Caught Up
Yet |
| Source: Ned
Davis Research |
Although the market crash of 1929 is widely accorded status
as a singular event in this country’s financial history, it was, in fact, the
first in a series of tremors that rocked the markets in the period preceding
World War II. After the crash of 1929, the S&P 500 lost as much as 20
percent of its value on 11 separate occasions throughout the 1930s and into
1942.
The largest such decline in value came in the period beginning November 9, 1931 and ending
June 1, 1932, in which the S&P 500 lost almost 62 percent of its value. That loss was
recovered a mere 13 months later in July 1933. However, the second steepest decline
(beginning March 6, 1937 and lasting through March 31, 1938), which measured 54.50 percent,
was not recovered as quickly. Almost eight years later, on February 2, 1946, the S&P 500
regained the 54.50 percent that had been lost. Those who suffered through the 1929 debacle
and stayed the course were not made whole until 1954, a 25-year period.
Since the end of World War II, there have been 10 bear markets, the most recent encompassing the period March 24,
2000 through April 4, 2001. As of mid-May 2001, that 27.77 percent loss is yet to be
recovered.
The period that should caution today’s investors is that which encompassed the late 1960s
and continued on through the early 1970s. Bear markets progressively grew deeper and longer.
A 22 percent decline that began in February 1966 was recovered 15 months later. Less than
two years after that recovery, however, another bear market began, this time spilling 36
percent of the S&P 500’s value, with full recovery not occurring until March 1972. But the
bears still weren’t done. Another bear market began in January 1973, and didn’t let up until
October 1974, when almost half the stock market’s value had vanished. Not until July 1980
did the market gain back that loss.
The point here is that volatile markets can move sharply and often. Many analysts say that
the market has bottomed out and is in recovery mode. This may very well be. But that provides
no immunity from the throes of another bear market, which could conceivably be longer in
duration and involve a steeper decline. As the technology sector boosted stocks to new
heights in the late 1990s, investors were fond of dismissing standard equity analysis as
outdated and irrelevant to the present situation. They have since been chastened. But will
the lessons learned by previous generations about market gyrations be lost on today’s
investors? Stories abound of investors who suffered significant losses of value in their
stock portfolios and have bailed out of the market entirely. Others, who have kept the faith,
profess to a more modest approach this time around. Do they appreciate that the stock market
does not move in an upward line with mere hiccups interrupting the trend, but, instead,
sometimes looks like the letter “W”? And if the latter, will many investors decide they no
longer have the stomach for this game, thereby shrinking the pool of investors willing to
buy, making it even more difficult for those who stick it out to find buyers when seeking to
sell a stock? The answers to these questions have important implications for the continued
health of the stock market and for those who hope to profit from equities.
