Bear Market Expectations

Aug.10.11 | About: SPDR S&P (SPY)

If in fact we are in the midst of a new bear market, it would be instructive to take a look at the historical record to get some idea of the type of declines that can be expected. But first, a couple of assumptions:

  • We are currently in a secular bear market.
  • The cyclical bull market that began in March 2009, finished on April 29, 2011, with a S&P500 (NYSEARCA:SPY) closing high of 1363.61.
Given the assumptions above, if we examine bear markets since the beginning of the twentieth century shown in the chart below, the average bear market decline is 39%. So an average bear market would imply around 830 on the S&P500. Jeremy Grantham recently put fair value for the S&P500 at 920.
(Click chart to enlarge)
Click to enlarge

However, before you rush out and get short the market we should also note that there are only 12 observations over a 100-year period and that there is quite a large range of 19% - 57%. So we shouldn't kid ourselves about trying to put a precise number on a potential bottom, but we should be open to the possibility that this bear market may have lot further to go on the downside and to be wary of going bargain hunting too soon.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.