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 last of a three-part series, you'll find an overview of notable bear markets in the recent history of the Dow Jones Industrial Average. Each bear market overview includes 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've finished reading, don't forget to check out the other parts of this series, as well as the companion series to this one that highlights the Dow's many bear markets. You can find the links below.
1968-1970: Vietnam jitters
- Began (starting price): Nov. 29, 1968 (985.08)
- Ended (final price): May 26, 1970 (631.16)
- Number of trading days: 370
- Total percentage loss and average loss per trading day: 36%, 0.10% per day
- Volatility (i.e., average daily price change): 0.58%
- CAPE, initial and final: 22.3 to 13.8 (38% decline)
The escalating conflict in Vietnam caused widespread unrest and protests in the latter part of the 1960s. Inflation and the expansion of government entitlements, begun under President John F. Kennedy but greatly expanded by President Lyndon Johnson's Great Society, also contributed to worries among the investor class. Interest rates rose beyond 9% by 1969 as the Federal Reserve attempted to combat inflation, further tightening the supply of credit.
1973-1974: Nixon and OPEC price shocks
- Began (starting price): Jan. 8, 1973 (1,047.86)
- Ended (final price): Dec. 6, 1974 (577.6)
- Number of trading days: 485
- Total percentage loss and average loss per trading day: 45%, 0.09% per day
- Volatility: 1%
- CAPE, initial and final: 18.7 to 8.3 (56% decline)
President Richard Nixon had taken the U.S. off the gold standard in 1971 and would resign in disgrace over the Watergate scandal by early 1974. These two events bookended the OPEC oil embargo, which sent oil prices skyrocketing to four times their 1973 levels by the time of Nixon's resignation. The dollar weakened under the weight of these crises, inflation ran at one of the highest levels of any bear market (the consumer price index increased 22% during this time), and interest rates continued their rise. The Nifty 50's growth was finally undone after a decade of largely positive momentum. IBM's (NYSE:IBM) P/E slipped from 40 to 12 by the end of this bear market.
- Began (starting price): Sept. 21, 1976 (1,014.79)
- Ended (final price): Feb. 28, 1978 (742.12)
- Number of trading days: 363
- Total percentage loss and average loss per trading day: 27%, 0.07% per day
- Volatility: 0.56%
- CAPE, initial and final: 11.3 to 9.5 (21% decline)
The Carter years experienced less inflation than the post-Nixon bear market, but they also experienced flat real earnings growth -- thus, "stagflation." The CPI grew roughly 10% during this period, but real earnings increased just 3%. This bear market was also the first to experience what would become an ongoing and deepening trade deficit. Gold enjoyed a dramatic rise as an inflation hedge.
1981-1982: Volcker crash
- Began (starting price: April 24, 1981 (1,024.05)
- Ended (final price): Aug. 12, 1982 (776.92)
- Number of trading days: 329
- Total percentage loss and average loss per trading day: 24%, 0.07% per day
- Volatility: 0.63%
- CAPE, initial and final: 8.8 to 6.6 (25% decline)
This relatively shallow bear market resulted from the combination of a deep recession and Fed Chairman Paul Volcker's determined inflation-fighting efforts, which exacerbated the recession. An oil price shock in 1979 also had lingering effects on the American economy. Stocks began this bear market already at their lowest valuations in a generation and continued lower to a CAPE not seen since the Great Depression. The Fed's discount rate, which is the interest rate it charges banks to borrow its reserves, hit an all-time high of 14% in mid-1981 and was not lowered back into the single digits until after this bear market had bottomed out.
1987: Black Monday crash
- Began (starting price): Aug. 25, 1987 (2,722.42)
- Ended (final price): Oct. 19, 1987 (1,738.74)
- Number of trading days: 39
- Total percentage loss and average loss per trading day: 36%, 0.93% per day
- Volatility: 1.7%
- CAPE, initial and final: 18.3 to 13.6 (26% decline)
One of the most bewildering bear markets in history was also the shortest and most violent by far. Without the 23% drop on Black Monday that marked the end of this crash, it would have been a relatively minor 17% correction. It was this event that awakened investors to the new reality of computerized trading and provided market regulators the impetus to implement new mechanisms to rein in the worst automated excesses.
1990: Iraq contraction
- Began (starting price): Jul. 17, 1990 (2,999.75)
- Ended (final price): Oct. 11, 1990 (2,365.1)
- Number of trading days: 62
- Total percentage loss and average loss per trading day: 21%, 0.34% per day
- Volatility: 1.05%
- CAPE, initial and final: 17.7 to 15.2 (14% decline)
The Gulf War began midway through this bear market, sending oil prices spiking to a decade high in October of 1990. This, combined with the simmering savings and loan crisis and the decline of Japan's Nikkei index from its all-time high, produced a short, mild downturn that is sometimes termed a correction rather than a bear market.
2000-2002: Dot-com crash
- Began (starting price): Jan. 14, 2000 (11,722.98)
- Ended (final price): Oct. 9, 2002 (7,286.27)
- Number of trading days: 694
- Total percentage loss and average loss per trading day: 38%, 0.05% per day
- Volatility: 1.05%
- CAPE, initial and final: 43.8 to 22 (50% decline)
Stock valuations at the peak of the dot-com bubble were higher than at any other time in the Dow's history, driven by unchecked speculation (or "irrational exuberance") divorced from any due diligence or sensible expectations for the future. A number of dot-com start-ups went bankrupt within a year of going public in 1999 and early 2000, and a number of major corporate accounting scandals, particularly those of Enron and WorldCom, further shook investor confidence. The 9/11 attacks deepened a mild recession and further prolonged the slide, which became the second-longest of the postwar era. The Nasdaq (NASDAQINDEX:^IXIC) peaked two months after the Dow but has never recovered due to the number of worthless or drastically overpriced dot-com stocks added during the bubble. The merger of AOL and Time Warner (NYSE:TWX.DL) was this bear market's canary in the coal mine. Announced just four days before the Dow's peak, the resulting combination never lived up to its initial $350 billion price tag.
2007-2009: Housing and financial crisis
- Began (starting price): Oct. 9, 2007 (14,164.53)
- Ended (final price): March 9, 2009 (6,547.05)
- Number of trading days: 356
- Total percentage loss and average loss per trading day: 54%, 0.15% per day
- Volatility: 1.51%
- CAPE, initial and final: 27.3 to 13.3 (51% decline)
A debt-fueled housing bubble blew apart in spectacular fashion during this bear market. The proliferation of financial instruments tied to home loans proved disastrous for the global financial sector as millions of American homeowners defaulted on homes they couldn't afford. Liquidity dried up around the world, forcing central banks to take unprecedented action and compelling governments to enact enormous stimulus measures to prop up their ailing economies. This was the second-deepest and second-most-volatile (excepting 1987) bear market in the Dow's history next to the one that began the Great Depression -- a once-in-a-lifetime event for many investors.
Putting it all together
An era that began in uncertainty soon came to be ruled by excess. Many parallels exist between the Roaring '20s and the dot-com era, including the speculative mania of bubble times and extreme corrections that followed. After enduring two deep declines, the Dow has returned to a nominal level within reach of its all-time high. Is this the start of something durable, or is there another bear market in the near future? If the 1930s are any indication, we may not be out of the woods yet
Want to learn more about market cycles? You can find the rest of the series here:
- An Illustrated Guide to Bull and Bear Markets
- What Is a Bull Market?
- The Postwar Bull Market Boom
- Bull Markets in Modern Times
- What Is a Bear Market?
- Recession, War, and Bear Markets
- 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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