Comparing the Current Bear Market to Other Bear Markets of the Past 110 Years
By Gus Krafve
March 5th, 2009
The old adage goes “buy low and sell high.” So with the market down over 50% from its high, why isn’t there a rush of buyers coming into the stock market? Thus, the nature of a bear market, which is generally defined as a 20% or more decline in the stock market over at least a two-month period. While no one can predict how far a market will decline or how long a bear market will last, we will attempt to provide some framework by analyzing bear markets of the past 110 years.
Since 1900, we have had 25 bear markets according to Ned Davis Research. From a percentage decline, the worst bear market occurred from 4/17/1930-7/8/1932. During that 813 day period, the Dow Jones Industrial Average lost 86% of its value. This decline occurred as the excesses of the roaring twenties came to an end. The Dow rose over 500% from 1921-1929. A further contributing factor to the bear market was a decline in real estate prices which began in 1925. Significantly, the unemployment rate peaked in 1933 at 25%!
The shortest bear market was 55 days and occurred during 8/25/1987-10/19/1987. During the 1987 bear market, the Dow lost 36.1% of its value. Similar to the early 1930’s bear market, the 1987 bear was preceded by excess speculation in stocks. From 1982-1987, the Dow rose 350%. Also contributing to the decline were inflation concerns and high interest rates. The prime rate rose to over 9% and short-term Treasury rates were around 8%.
Conversely, the longest bear market was 959 days and occurred between 9/12/1939-4/28/1942, a period of time when the Dow lost 40.4% of its value. This period occurred at a time when the Great Depression was ending and World War II was beginning. The end of this bear market marked the beginning of one of the greatest economic expansions in history.
How does this current bear market measure up? The current bear market began on 10/9/2007, and is now in its 508th day as of the end of February. Since this bear market began, the market has lost 50.1% of its value. As compared to the previous 24 bear markets, the current bear is the 9th longest. From a percentage decline, the current bear market is the 2nd worst going back 110 years.
History has shown us that the more severe the economic contraction and stock market decline, the more dramatic the economic recovery and appreciation in stock prices. Also, it is important to consider that stock prices can rise in the face of bad economic news. In a recent note to shareholders, Warren Buffett said, “the economy will be in shambles throughout 2009 – and, for that matter, probably well beyond – but that conclusion does not tell us whether the stock market will rise or fall.”
