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What causes a bear market? How does it get started, and how does it end? What happens to stock fundamentals during these bearish times? There are no ironclad rules that can teach you to identify the beginning and end of bear markets to come, but there are some similarities that all bear markets share. Understanding the way bear markets work can help you become a better and more informed investor -- and if you're the inquisitive sort, you're also bound to find some interesting parallels between otherwise unrelated market cycles. History may not repeat, but it often rhymes.
Here, in the first of a three-part series, you'll find an overview of every notable bear market in the early history of the Dow Jones Industrial Average, including some basic background data, some of the market's major fundamental changes during those periods, and a brief description of the economic, social, technological, financial, and political forces at work.
When you're done here, don't forget to check out the other parts in this series, as well as the companion series that highlights the Dow's many bull markets. Find the links below.
1899-1900: Credit contraction
- Began (starting price): Sept. 5, 1899 (77.61)
- Ended (final price): Sept. 24, 1900 (52.96)
- Number of trading days: 264
- Total percentage loss and average loss per trading day: 32%, 0.12% per day
- Volatility (i.e., average daily price change): 0.98%
- CAPE, initial and final: 20.6, 18.1 (12% decline)
A surge in railroad mergers sapped much of the credit available to investors by the fall of 1899. The Klondike gold rush, which fed large quantities of gold into the gold-standard financial system of the United States beginning in 1897, also concluded by the end of 1899, curtailing monetary expansion, and investors had begun a generational shift toward corporate bonds as their primary source of returns.
1901-1903: Rich man's panic
- Began (starting price): June 17, 1901 (78.26)
- Ended (final price): Nov. 9, 1903 (42.15)
- Number of trading days: 603
- Total percentage loss and average loss per trading day: 46%, 0.08% per day
- Volatility: 0.83%
- CAPE, initial and final: 23.1 to 15.4 (33% decline)
President William McKinley's assassination in September transformed a simmering bear market into outright panic, which was briefly interrupted by President Theodore Roosevelt's efforts to break up the entities manipulating the market, particularly in Northern Pacific Railroad stock. The "rich man's panic" in 1903, caused by high interest rates, persistent stock-dilution, and more aggressive trust-busting, sent the Dow to its 1903 low.
1906-1907: Rich man's recession
- Began (starting price): Jan. 26, 1906 (102.9)
- Ended (and final price): Nov. 22, 1907 (53.08)
- Number of trading days: 461
- Total percentage loss and average loss per trading day: 48%, 0.11% per day
- Volatility: 0.86%
- CAPE, initial and final: 19.9 to 11.3 (43% decline)
The opening of a landmark antitrust suit against the colossal Standard Oil Trust and the devastating San Francisco earthquake both contributed to the depth of this bear market. A bubble in copper also popped during this period. A chain of bank failures in 1907 caused the Panic of 1907, which brought the bear market to its final lows and also provided the impetus for creating the Federal Reserve. It was only the intervention of the eponymous founder of JPMorgan (NYSE: JPM ) , who acted as a Federal Reserve by marshaling millions of dollars in defense, that prevented further losses.
1909-1914: Extended profit-taking
- Began (starting price): Nov. 19, 1909 (100.53)
- Ended (final price): Dec. 24, 1914 (53.17)
- Number of trading days: 1,180
- Total percentage loss and average loss per trading day: 29%, 0.02% per day
- Volatility: 0.58%
- CAPE, initial and final: 14.8 to 10.2 (31% decline)
This was the longest bear market in the Dow's history, as well as its mildest in terms of its average daily decline. The preceding bull market had attracted many retail investors, and the shallowness of this decline offered them many opportunities to take their profits from an unpopular market, the leading corporations of which had been savaged in the press by the trust-busting Teddy Roosevelt and other progressives. Several efforts were made to break through to new highs before the market was closed in 1914 following the first declaration of war that began World War I. It was only on the final day of trading before the market closure that the Dow slid well below a 20% loss.
1916-1917: World War I gloom
- Began (and starting price: Nov. 21, 1916 (110.15)
- Ended (and final price): Dec. 19, 1917 (65.95)
- Number of trading days: 269
- Total percentage loss and average loss per trading day: 40%, 0.15% per day
- Volatility: 1.07%
- CAPE, initial and final: 11.4 to 6.6 (42% decline)
President Woodrow Wilson's re-election on the slogan "He kept us out of war" reassured investors for less than a month before they began to run for the exits. At first, a peace panic arose out of worries that German capitulation would destroy overseas demand for American goods. Later, the American entry into World War I produced a volatile spring that ended with a steep decline into the winter.
1919-1921: Auto crash
- Began (starting price): Nov. 3, 1919 (119.62)
- Ended (final price): Aug. 4, 1921 (63.90)
- Number of trading days: 456
- Total percentage loss and average loss per trading day: 47%, 0.10% per day
- Volatility: 0.96%
- CAPE, initial and final: 6.5 to 5.2 (20% decline)
Loose monetary policies at the Federal Reserve snapped back into an extreme deflationary spiral. The transition from wartime to peacetime production hurt many industrial concerns, and mass labor strikes exacerbated the problem. Many automakers merged or went out of business during this period, and oil companies suffered terribly.
1929-1932: The Great Depression
- Began (starting price): Sept. 3, 1929 (381.17)
- Ended (final price): July 8, 1932 (41.22)
- Number of trading days: 714
- Total percentage loss and average loss per trading day: 89%, 0.12% per day
- Volatility: 1.98%
- CAPE, initial and final: 32.6 to 5.8 (82% decline)
While the Roaring '20s became the bull market against which all others are measured, its aftermath become the bear to end all bears. The period preceding the Depression was marked by extreme speculation and excessive leverage. More money was loaned to investors for margin purchases than circulated freely in the United States at the height of the bubble. Investing ceased to be related to fundamentals and instead chased after future returns, bloating the market's valuations to a level not surpassed until the dot-com era. A decline in commodity prices was all it took to set off a stampede of panic sales, which turned into a massive crash in October of 1929.
Putting it all together
The Dow ended its crash in 1932 at a level it had last touched in 1897, wiping out 35 years of progress in the process. The market had changed a lot since the Dow's creation, but extreme optimism had collapsed in a flight of fear, and a generation of would-be investors was scarred by the resulting depression. This formative period in the Dow's history laid the groundwork for a great deal of financial and economic reform that remains with us today, but it took the pain of millions to first awaken the public to the need for change.
Want to learn more? Consider starting with the bull markets that these bears began from, from 1896 to 1929. Or read on to the second part of this bear markets series, which covers the period from the middle of the Great Depression to the height of the Cold War.
- An Illustrated Guide to Bull and Bear Markets
- What Is a Bull Market?
- The Postwar Bull Market Boom
- Bull Markets in Modern Times
- Recession, War, and Bear Markets
- Bear Markets in Modern Times
- The Complete Illustrated Guide to Secular Market Cycles
AUTHOR'S NOTE: The cyclically adjusted P/E referenced throughout is compiled by Yale economist Robert Shiller from a historical S&P 500 composite. The Dow is used in place of this composite because it offers precise daily closing dates and prices, rather than the monthly results used in Shiller's calculations. The difference between these two indexes from the Dow's creation in 1896, on an inflation-adjusted basis, is less than 3%.
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