The Worst Bear Market in Modern History?

How does the current market compare with the worst bear markets since 1920. These markets are shown in the following table:

 

There are only two bear markets with greater loss than the current bear in the last 100 years: the market decline following the 1929 crash and the dot.com bubble burst NASDAQ crash earlier in this decade.

In the graph below we see that the rapidity of the current decline is now faster than all of the other bears, except for the 2000 - 2002 NASDAQ. 

click to enlarge images

If this bear market were to end soon it would have a significantly shorter duration than any other comparable bear market in the past 100 years

We also see that all the other bear markets had larger counter-trend rallies during the first year than the current bear. This is more clearly shown in the graph below with a shortened time scale.

The current bear market has been noticeably less volatile during the first 59 weeks than the four other “worst bears” in that the decline has been “smoother”.

If this bear market ends soon it will be remarkable in several regards:

1. Very short duration.
2. Unusually smooth decline with no large counter-trend rallies.
3. More rapid decline than any other broad market bear market. (The NASDAQ decline was really a sector decline with much less impact on the broader indices.)

Conclusion: This will either end soon and be an atypical secular bear market or it has some more time and fireworks left.

Comments

[Steven Hansen:]

why not consider the bear market began in mid 1999. we would only be down 30% - and we would then have the longest bear market in history. we should always try for records whenever possible.

2008 Nov 21 05:36 AM

[MaverickBian:]

First, in terms of volatility, I don't think this time the stock market would have been less volatile. If you zoom in on minites level or daily level, within a few weeks, DOW can add 2000 as a counter trend, yet countless bad news immediately pounched it down to new lows. In the past, we have Bear Sterns, then Lehman Brothers, and now we have GM and Citi...Sure we have more ahead if on every firm's balance sheet, assets shink a lot, then those whithout enough cash reserve and who couldn't raise capital will be forced into bankruptcy.

Just wonder, how many more firms can Paulson and Congress save?

Citi is in ER room now...

Whose will be the next?...In a word, too many...

2008 Nov 21 06:41 AM

[John Lounsbury:]

The Hand - - -

Please read my articles on Stock Market Cycles (on Seeking Alpha). You will see that there were no primary bear markets between the DJIA bottom of 10/11/1990 and the primary bull market top of 1/14/2000 (DJIA). The secular bull market containing the 1990's primary bull started from the 12/6/1974 bottom (578 DJIA) and ended with the 10/9/2007 top (14165 DJIA).

The S&P 500 follows the DJIA very closely. The NASDAQ had a secular top in early 2000 (as indicated in this article), but there was no secular low in 1998 for that market either.

There are lots of intermediate tops and bottoms (secondary moves), but these are contained within the major moves.

2008 Nov 21 10:32 AM

[John Lounsbury:]

Maverickbian - - -

Good comment. I should have been more specific in my observation. My comment applies only in a macro sense. With a micro view, this market has similar (maybe larger with some measures) volatility. For example, the VIX index has reached values equal or exceeding highs for previous markets.

2008 Nov 21 10:37 AM

[SpinWatch:]

John - This is a good comparison that gives a feel for what might be in the market's future. One refinement to this analysis would be to add inflation or deflation to this process. I bought my first stock in the 1973-1974 market when the market was at 689. The market continued crashing until it reached 642 upon which the media said that this was worse than the 1929-1932 period when adjusted for the deflation then versus the 1970's high inflation. Adjusting for inflation/deflation would narrow the percentage gap in the table (89% versus 48%) considerably. As the deflationary spiral drags on the comparative pain of the 2008 crash could be put into a better perspective with an adjustment for deflation.

2008 Nov 21 11:34 AM

[nym:]

Thanks, John. The conclusion reminds me of a weather report: it will either rain or it won't.

2008 Nov 21 11:58 AM

[carey_jim:]

nym:

RULE OF THE GREAT:

When somebody you greatly admire and respect appears to be thinking deep thoughts, they probably are thinking about lunch.

2008 Nov 21 12:28 PM

[John Lounsbury:]

Excellent suggestion. I'll take a look at this. I find the topic of inflation adjustment to stock market valuations very interesting. I wrote a feture article for The AAII Journal in February, 1996 looking at how the market at that time should be valued on an inflation adjusted basis. I came to the conclusion that, in February, 2006, U.S. stocks were undervalued. I have never done a follow-up study.


On Nov 21 11:34 AM SpinWatch wrote:

> John - This is a good comparison that gives a feel for what might
> be in the market's future. One refinement to this analysis would
> be to add inflation or deflation to this process. I bought my first
> stock in the 1973-1974 market when the market was at 689. The market
> continued crashing until it reached 642 upon which the media said
> that this was worse than the 1929-1932 period when adjusted for the
> deflation then versus the 1970's high inflation. Adjusting for inflation/deflation
> would narrow the percentage gap in the table (89% versus 48%) considerably.
> As the deflationary spiral drags on the comparative pain of the 2008
> crash could be put into a better perspective with an adjustment for
> deflation.

2008 Nov 21 02:16 PM

[John Lounsbury:]

Sorry - pleased correct "feture" to "feature".

2008 Nov 21 02:17 PM

[John Lounsbury:]

Jim - - -

Actually, I was thinking about a mid-night snack. Oooops! You were talking about RULE OF THE GREAT. That was someone else- my bad.


On Nov 21 12:28 PM carey_jim wrote:

> nym:
>
> RULE OF THE GREAT:
>
> When somebody you greatly admire and respect appears to be thinking
> deep thoughts, they probably are thinking about lunch.

2008 Nov 21 02:20 PM

[John Lounsbury:]

I like to present information to those who think for themselves. Although I occasionally do express an opinion, I do so with trepidadation because,especially with investment markets, there are as many variables as there are investors. Good luck making predictions.

I do find some value in making my investment decisions with a thorough understanding of what has happened under similar circumstances in the past. I believe that reversion to the mean is a valid concept. Applying that idea to the current situation, to look like the other three broad market declines of similar or greater magnitude leads me to these conclusions:

1. There will be a significant rebound followed by another leg down; OR
2. There will be a grinding, but more gradual decline with multiple correction rallies (secondary moves) to a bottom somewhere in late 2009 or 2010.

OR

3. This time is different and we will have a V-bottom and return to new all-time highs in the next 2-4 years.

If you have these scenarios in mind you have a frame-work within which to make investment decisions, what to buy, when to buy and when to hedge what you buy.

If you are an independent thinker, you can use history to formulate other scenarios in addition to the ones I have described. Ultimately, the scenarios that an investor chooses with which to formulate an investment plan will lead to a unique selection and schedule for vehicles and risk control.

If this is too complicated, buy the indices, buy and hold, and take your lumps. Guessing in an information vacuum is at best 50/50 compared to buy and hold.

nym, please don't take what I have written as a put down. I felt it was important to put my objectives in perspective.




On Nov 21 11:58 AM nym wrote:

> Thanks, John. The conclusion reminds me of a weather report: it will
> either rain or it won't.

2008 Nov 21 02:46 PM

[sleepless_o...:]

Excellent analysis. I second spinwatch's request for an inflation adjusted analysis of stock market performance, not only for the major bear markets, but also for the bull markets.

2008 Nov 24 11:40 AM

[John Lounsbury:]

One more correction : " I came to the conclusion that, in February, 2006, U.S. stocks were undervalued." should read

I came to the conclusion that, in February, 1996, U.S. stocks were undervalued.

2008 Nov 27 09:41 PM

[townncountry:]

JL, Much better, but the Dow didn't go anywhere really after 1996. The boom was nearly entirely tech. And as I recall, the PE of the Dow was already pretty high in '96 -- about 17x, 18x, or 19x or so, if memory serves well -- right? And p/b was approaching 3x., So if you guessed hey were undervalued at the time, what stocks were you looking at, and what metrics were you using.

(In fact, given the relatively lower low p/es of European and emerging market companies in 2006 and the falling dollar, one could say that a good analyst would have concluded that more foreign stocks were undervalued in 2006 than US stocks were in 1996.)

But then these impressions are from memory, and not from data. Just wondering if my memory serves me right?


On Nov 27 09:41 PM jlounsbury59 wrote:

> One more correction : " I came to the conclusion that, in February,
> 2006, U.S. stocks were undervalued." should read
>
> I came to the conclusion that, in February, 1996, U.S. stocks were
> undervalued.

2008 Dec 14 10:47 PM