Chart of the Day: Anatomy of a Bear Market

The S. & P. 500 "officially" entered bear market territory yesterday, meaning it's dropped 20 percent the October 9, 2007 peak. The index has seen similar declines six previous times since 1950, and while previous performance won't help us predict the future, it can at least be a guide.

The following chart shows the number of trading days it took the S. & P. 500 to hit bear market territory after reaching a peak, how long it took to go from the start of the bear market to a low, how long before it retraced its way back to the previous peak, as well as the percentage drop from peak to low:

As is evident from the chart, there appear to be two kinds of bear markets:

1) relatively short ones like those which followed peaks in '61, '66, '68, and '87
2) or extended ones like those following the '73 and '00 peaks

Some think that we're in for something resembling type 2, but let's be generous and instead take the average of all six. Then we might expect the S. & P. to hit its cycle low at the end of next summer, and rebound back to its October peak somewhere around 2011-12.

Jeremy Siegel, Wharton professor and author of Stocks for the Long Run, thinks the way to avoid scenario 2 is for oil to drop to $100.

...if I were to say "What is bedeviling the market right now, worldwide?" I would say that the energy question is more important now than the credit question.

While I'm on the subject, it's worth pointing out that we've actually come out of another type of bear market recently.

 

Comments

[scimitar:]

The parallels to the early 1970s are eerie - high energy costs, a wasteful US consumer (then: big family sedan guzzlers; now: big SUVs), surging demand from emerging economies, volatility in the Middle East, low levels of consumer and investor confidence.

At least in the 1970s you could get around 13% in a Fidelity money market. Back then, people actually tried this amazing & revolutionary concept: you know - saving money! Lately, we've just preferred to spend 1.5 times what we make and incur 30.99% APR, and when that fails take out huge HELOCs which then become part of CDOs rated AAA.

We've tried to stave off a natural correction in our economy for so long with cheap money that this correction is going to be much more painful than it ever would have if we'd tightened up liquidity in the first place! But don't tell Alan Greenspan.

2008 Jul 10 04:28 PM

[Larry House:]

I hope, I hope, I hope this is just a type 1 or a type 2, but I am really concerned that this bear is going to be a type 3, and he is going to growl like we have never heard. I hope I am wrong.

2008 Jul 10 04:30 PM

[TA:]

Has there ever been a bear market that had 2 issues(housing, oil) and not excessive valuation?

How can we be type 2 without excessive valuation?

2008 Jul 10 04:40 PM

[whidbey:]

And, maybe you are wrong about the nature of declines. Since markets are emotional and sentiment is the driver of individuals we should expect the markets to move in response to what we can see and believe in. If that is true we must believe in a bifurcated market where consumers are not going to do well for a time, but export industry is going to do rather well for sometime. Actually, as the USA admits it is export driven a major change will occur in the economy, and likely before not too long. We will become exporters of technology, services, pharma, food, fashion, entertainment etc. It is probably vastly more complex than you suggest.

2008 Jul 10 05:37 PM

[sidney:]

i would suggest you pull up japan's bear market crash info as a type 3 for what it looks like to see an real estate/stock market combined crash... bet its not pretty

2008 Jul 10 07:47 PM

[yea ok:]

Extremely good analysis

2008 Jul 10 11:05 PM

[theoilyboy:]

Great article. Nice way to look at it. Thanks.

2008 Jul 10 11:52 PM

[Steve Szirom:]

I believe you missed two bear markets in S&P500. One in 1980, declined 28%. The other one was in 1990, declined 20%.

2008 Jul 11 05:27 PM

[roid:]

Could you make the data for your chart available (perhaps the Excel spreadsheet if there is one). I'd like to do some additional analysis. Thanks.

2008 Jul 12 03:42 PM