A Brief History of Bear Markets

Well, it's finally here, and we've had plenty of warning. The S&P 500 (INDEX: ^GSPC) officially slipped under the limbo stick that marks an "official" bear market on October 4th, shedding 21.6% of its value since its May 2 peak. The Dow Jones Industrial Average (INDEX: ^DJI) isn't far behind, down 19.5% from that same day. We've had plenty of bear markets to compare with, so is this time really different, or are clues to our financial future hiding in the wreckage of the past?

Bear necessities
Broadly speaking, a bear market is any decline of 20% or more in a broad market index. This isn't a hard and fast rule -- there were three major drops from 1937 to 1942, yet they get bundled into one longer bear market on occasion. For investors who lived through it, it didn't matter how many there were; none of those bears were just right.

Bear Market Dates

Length

Market Loss

Recessions

What Happened?

9/3/29 – 7/8/32

34 months

89.2%

8/29 – 3/33

The Great Depression (no surprise here).

3/10/37 – 3/31/38

12 months

49.1%

5/37 – 6/38

Government austerity and tax increases caused a jump in unemployment, or the monetary supply expanded too rapidly. Economists disagree on the causes. I'm as shocked as you!

11/9/38 – 4/11/39

5 months

21.7%

None

The herd was skittish.

9/12/39 – 4/28/42

31 months

40.4%

None

World War II.

3/10/37 – 4/28/42*

61 months

52.2%

5/37 – 6/38

See above.

4/6/56 – 10/22/57

18 months

19.4%

8/57 – 4/58

Tight monetary flows, global political uncertainty, Sputnik.

11/15/61 – 6/26/62

7 months

27%

4/60 – 2/61

The first tech bubble burst (IBM (NYSE: IBM  ) had a P/E above 80 before this bear started, but its P/E is just over 14 today), Bay of Pigs fiasco, rising interest rates.

2/9/66 – 10/7/66

8 months

25.2%

None

Vietnam, tight investment capital, flight to high bond yields.

11/29/68 – 5/26/70

13 months

35.9%

12/69 – 11/70

Vietnam again, Nixon elected, rising interest rates, angry hippies, fiscal and monetary tightening.

1/8/73 – 12/6/74

23 months

44.9%

11/73 – 3/75

Stock price corrections, oil price shocks and stagflation, rising unemployment, no Nixon to kick around anymore.

9/21/76 – 2/28/78

16 months

26.9%

None

High inflation and rising oil prices.

4/27/81 – 8/12/82

16 months

24.6%

6/81 – 11/82

Super Volcker battled the evil inflation monsters.

8/25/87 – 10/26/87

2 months

34.1%

None

Black Monday. Everybody panic!

7/16/90 – 10/11/90

3 months

21.1%

7/90 – 3/91

Weakened economy, oil price shocks, high debt, consumer pessimism. Sound familiar?

4/3/00 – 10/9/02

30 months

35.1%

3/01 – 11/01

Dot-com bubble exploded, 9/11.

10/9/07 – 3/9/09

17 months

53.8%

11/07 – 6/09

Subprime mortgage crisis, worldwide financial madness, credit crunches and layoffs and bailouts, oh my.

Avg. (3 in the 30s)

16 months

36.5%

10 out of 15

 

Avg. (1 in the 30s)

19 months

37.6%

10 out of 13

 

Avg. 5 worst**

23 months

55.5%

4 out of 5

 

Avg. 5 mildest**

10 months

22.3%

3 out of 5

 

Sources: Yahoo! Finance, author's calculations, and numerous history-laden websites.
*Assumes multiple bear rallies but no official recovery until post-1942.
**By percentage drop. Assumes three separate recessions in late 1930's.


Be smarter than the average bear
We're now in the fifth month of our current bear market, and there's no telling where it will go from here. With the European default crisis unresolved, a shaky American economy, and political gridlock at home and abroad, our current problems bear similarities to several different declines. History might not repeat itself, but it often rhymes, and our present "Ode to Bears" looks like a mishmash of 1938 (the short one), 1966, and 1990, with a few words clipped from 2007.

My colleague Morgan Housel looked at the cyclically adjusted P/E ratio in August and found it trending very close to its postwar average. Prices are more reasonable by this measure than they've been at any point in the last decade, except during the last downturn -- which should signal opportunity for savvy investors.

Swipe that pic-a-nic basket
You can find those opportunities even deep in a bear cave. I looked back at 2008 to find a handful of high-flyers that avoided the subprime freefall. You shouldn't be surprised by what made it:

  • Family Dollar (NYSE: FDO  ) was up 23% in 2008. The discount retailer offers budget-conscious consumers a safe haven, and that's bound to be important if belt-tightening continues.
  • Amgen (Nasdaq: AMGN  ) rode the 2008 bear to a healthy 25% gain. It's flat this year, but that beats a 20% loss, and the company's still very healthy, sporting a P/E of 11.3 and a recently instituted 2% dividend.
  • Walmart (NYSE: WMT  ) joined its bargain brethren (that's Family Dollar) on the 2008 outperformance list with a 16% gain. Little has changed since then, and the company isn't going to roll back into unprofitability in the foreseeable future.
  • One of the best 2008 performances came from UST, which was acquired by Altria (NYSE: MO  ) that year. UST's new parent may be 2011's top stock, as it's up 8% this year and has beaten the Dow by 57% over the last five years -- and that's before dividends!

They're more afraid of you than you are of them
So we're in a bear market. Take a deep breath and relax. There are still opportunities in the wreckage, and as always, every little bit of information helps. Adding these solid companies to your Watchlist would be a great first step toward figuring out how you plan to survive without getting mauled.

If you're still nervous about the coming storm, there's a video you really need to watch before the real crash comes. It's got the information you need to protect your investments, and it's absolutely free.

Fool contributor Alex Planes holds no financial stake in any company mentioned here. Follow him on Google+ -- he promises not to link to any LOLcats. The Motley Fool owns shares of Wal-Mart Stores, International Business Machines, and Altria Group. Motley Fool newsletter services have recommended buying shares of and  creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (23)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 05, 2011, at 2:56 PM, ernieslog wrote:

    i date the current bear to the high around 2008, i know there was a signicant recovery but we never came close to the previous high and we were, two days ago, approching the previous low. my opinion may be colored by the fact that i bought heavely in aug and sept and i should have waited awhile. i am not a bear and i fully expect a significant recovery. incidently i bought again three days ago and i would buy again but my leverage is almost .25 and i am 83 so there is a limit to how much risk i can handle.

  • Report this Comment On October 05, 2011, at 4:06 PM, TMFBiggles wrote:

    Ernie,

    By some accounts we've been in a secular bear market since the dotcom bubble burst back in 2000. But all definitions aside, we're not in a bull market right now by any measure. Stay tuned for a followup article that analyzes post-bear market gains, you might be pleased with the results.

    Recovery is inevitable, but the question is when it will begin in earnest, and just how bullish it will be. The news cycle has been dictating every swing, it seems.

    -Alex

  • Report this Comment On October 05, 2011, at 5:54 PM, xetn wrote:

    A recovery may or not be inevitable. We are in new and uncharted waters with Fed attempts to stimulate the economy failing and the Administration and Congress with out a clue what to do about jobs. (In fact they can't do anything about them.) We have had several attempts to "create" jobs but we are perhaps worse off that we were post stimulus. In short, it appears to me that the government is out of ammo and are running scared. One indication of that is Sarah Bloom Raskin (a member of the Board of Governors of the Federal Reserve System) giving speeches on how great the Fed is doing in holding down interest rates And now the new "twist" to holding down longer term rates. This policy has never worked the two times it has been tried.

  • Report this Comment On October 05, 2011, at 5:56 PM, xetn wrote:

    Just in case you would like to read about how Raskin's speech was torn apart, you can read:

    http://lewrockwell.com/north/north1041.html

  • Report this Comment On October 05, 2011, at 6:50 PM, chaz572 wrote:

    I'll echo xetn's "new and uncharted waters" comment. A few questions I'd find interesting to have answers to (Alex? Or maybe Morgan -- Morgan has proven excellent at digging up hard numbers like this)...

    * On a percentage basis, when is the last time we expanded our money supply as much as we just did in QE1 and QE2? If never, what was the previous largest money supply expansion, and how does it compare to what the Fed has done in the last few years?

    * What was inflation like following that last significant money supply increase? How high did it get; how long did it stay there; how long after the money supply increase did it manifest? Based on that, can we project a few scenarios of what inflation might be like following this monetary expansion?

    * What were treasury yields like during that inflationary period? Similarly, can we project a few scenarios of what treasury yields might do in the coming inflationary period?

    * What is Uncle Sam's current debt service burden as a portion of total budget, and what will it become if we assume the above projected treasury yields come to pass?

    * Are you so sure about that recovery now?

    Just a thought experiment, but one I'd love to see a disciplined researcher put some numbers to that are grounded in history and realistic analysis. Might make a wonderful followup article for the Fool.

  • Report this Comment On October 05, 2011, at 7:08 PM, TMFBiggles wrote:

    @ Chaz,

    That would take some digging. It would be interesting to see what comes up with some research, but I'm not sure how many hard answers it would provide.

    Generally speaking, yes, I am sure that we will have a recovery. To say that the economy will never recover and that we'll always be stuck in a miserable secular bear out to infinity* is gloomy even for me. It might take time, but there will be a recovery.

    -Alex

    *(or 2012, or Nibiru, or some other tinfoil hat conspiracy-theory-of-the-week Armageddon destroys us all.)

  • Report this Comment On October 05, 2011, at 7:14 PM, Frankydontfailme wrote:

    Heh. Chaz, more likely to be ignored. Fool is on the sell-side. No profit for them in recommending gold and cash.

  • Report this Comment On October 05, 2011, at 9:36 PM, CCharing wrote:

    What exactly defines the "end" of a bear market - when the market retakes it's previous value?

  • Report this Comment On October 05, 2011, at 10:48 PM, TMFBiggles wrote:

    @ CC,

    A bear market is said to end at the market bottom. Standard assessments of bear markets (this is one, I'm not original at all) begin at a market peak and end at the lowest point before a new rally. Besides the 1938 superbear, it's been pretty easy to tell where it begins and where it ends by looking at a chart of the movements.

    I don't follow the line of thought that says we never left a bear market after the 2007 crash. If you believed that in early 2009 and kept your money out of the market, you'd have lost out on some tremendous opportunities.

    If you're in the middle of the bear, it's almost impossible to say where its end is until you're well past it. We could have bounced off the bottom yesterday on our way back up, or we could be in for deeper declines later soon. If we drop further past the intraday low from the 4th you're probably going to start seeing some commentators start asking "is this the market bottom?" every few days.

    Hope that helped.

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