After the Bear Is Gone

I recently took a look at the history of bear markets to try to understand what makes them tick and how bad our current market might get. One thing I overlooked by focusing on the specifics of each decline was the strength of the ensuing rebound. As my colleague Morgan Housel pointed out last month, recessions bring opportunity. If you agree, get your gear and let's go hunting, because there should be some superior returns just around the corner.

Same declines with the same old news
There have been 15 identifiable bear markets since (and including) the Great Depression. They may vary in length and severity, but one trait all share is that they inevitably end. The Dow (INDEX: ^DJI) has always picked itself up after it's been knocked down, and this time should be no different. How does the market do afterward?

Bear Market Dates

Loss

Time to Next Bear

3-Yr. CAGR*

5-Yr. CAGR*

10-Yr. CAGR*

9/3/29 - 7/8/32

89.2%

4 years 8 months

32.8%

13.1%

7.2%

3/10/37 - 3/31/38

49.1%

7 months

7.4%

3.3%

6.0%

11/9/38 - 4/11/39

21.7%

5 months

(9.4%)

0.6%

3.2%

9/12/39 - 4/28/42

40.4%

14 years

20.2%

6.0%

10.5%

4/6/56 - 10/22/57

19.4%

4 years 1 month

9.6%

2.9%

7.4%

11/15/61 - 6/26/62

27.0%

3 years 8 months

15.6%

4.4%

5.3%

2/9/66 - 10/7/66

25.2%

2 years 1 month

2.0%

0.4%

1.8%

11/29/68 - 5/26/70

35.9%

2 years 8 months

8.8%

1.7%

2.0%

1/8/73 - 12/6/74

44.9%

1 year 9 months

10.5%

3.1%

6.6%

9/21/76 - 2/28/78

26.9%

3 years 2 months

9.5%

4.1%

10.5%

4/27/81 - 8/12/82

24.6%

5 years

14.0%

11.4%

13.9%

8/25/87 - 10/26/87

34.1%

2 years 9 months

7.0%

4.9%

14.5%

7/16/90 - 10/11/90

21.1%

9 years 6 months

14.6%

6.9%

15.6%

4/3/00 - 10/9/02

35.1%

5 years

7.5%

10.7%

2.8%**

Simple Average

36.5%

4 years 3 months

10.7%

5.3%

7.7%

Source: Yahoo! Finance. *Compound annual growth rate of the Dow, calculated after the end of each bearish period. Excludes dividends. **Nine-year CAGR used.

For comparison, the Dow has a CAGR of 4.7% (sans dividends) since 1928. If you want to be really generous and start tracking it in 1932 after the worst loss in history, it's returned an average of 6.7% each year. Our five-year CAGR number doesn't match that growth, which is a little puzzling until you realize that the average time between bear markets is seven months shorter. It's just enough time to squash multiyear rallies and skew the numbers. "Buy and hold" still seems to do the trick on a longer timeline.

Same habits that you just can't lose
We're currently five months into a bear market, or two years and seven months removed from our last big drop if you'd like to feel optimistic. I don't believe that we're out of the woods yet -- history has given us more bumpy roller-coaster rides than lengthy leisure cruises. The explosive trend that started after 1978 really took off in the '80s, but investors who bought into the Dow in 2002 have seen gains that barely beat annual inflation. If the next great bull market starts around 2017, what can we do to keep growing our wealth in the interim?

Here are some stocks you might want to choose
The Dow isn't perfect -- like any index, it has its black sheep. However, its basket of large-cap stocks has a number of steady producers that have withstood market gyrations and kept growing:

Company

P/E

Dividend Yield

5-Year Performance vs. Dow

Intel (Nasdaq: INTC  )

9.7

3.9%

10.7%

Coca-Cola (NYSE: KO  )

12.2

2.8%

52.5%

Chevron (NYSE: CVX  )

8.0

3.4%

48.5%

ExxonMobil (NYSE: XOM  )

9.6

2.6%

16.0%

IBM (NYSE: IBM  )

14.2

1.7%

120.8%

McDonald's (NYSE: MCD  )

17.5

3.2%

128.6%

Average

11.9

3.0%

65.0%

Source: Yahoo! Finance and Google Finance.

Holding this basket of stocks over the past five years would have gotten you an annual return as good as any five-year post-bear returns, and these are companies you can hold onto for the long haul.

After the bear is gone
It doesn't matter whether the next bull market starts in six days or six years. There are bargains right now, including our beat-the-bear basket above, and plenty more besides. Adding these companies to your watchlist can keep you locked and loaded with consistent updates and daily news. It's a great first step toward beating the market.

If you think McDonald's has been growing quickly, we've got the scoop on a franchise that could be the next McDonald's. It's all here in a report on the best IPO of 2011, and it's free!

Fool contributor Alex Planes holds no financial stake in any company mentioned here. Follow him on Google Plus -- he promises not to link any Lolcats. The Motley Fool owns shares of Coca-Cola and International Business Machines. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of McDonald's, Chevron, Intel, and Coca-Cola. Motley Fool newsletter services have recommended creating a diagonal call position in Intel. 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.


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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 09, 2011, at 10:25 PM, daveandrae wrote:

    As of October 3rd, 2011, the twelve month trailing earnings for the s&p 500 stood at $91.60, an all time high. The 90+ year trailing p/e multiple average of the s&p 500 is 14.5.

    Thus, not only is "mean reversion" more probable than possible in the not too distant future, (14.5 x's 91.60 = 1328) but until corporate earnings begin to decline in a meaningful way, the great secular bull market that began two and half years ago has much, much, further to go.

  • Report this Comment On October 10, 2011, at 10:49 PM, TMFBiggles wrote:

    I don't think I've seen anyone else peg the start of a secular bull market to the end of the 2007 bear. What's your reasoning for that?

    -Alex

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