The Markets Have Spoken: They Say 'Bear'

Jan. 07, 2008 6:51 AM ETDIA, SPY, QQQ, IWN1 Comment
Caleb Sevian profile picture
Caleb Sevian

Last week brought about an interesting turn of events; the Russell 2000 Value Index dropped below 20% from its recent peak set in May of 2007. Typically, a 20% drop in an index is one definition of a “Bear Market”. I guess this should be no surprise since Value Indexes as a whole tend to have a proportionately higher percentage of financial stocks than Core Indexes such as the Russell 2000 or the S&P500.

With the Financial and Consumer Discretionary sectors down over 30% from their highs, and together comprising close to 50% of the Russell 2000 Value Index, the relative decline of the Value Indexes is easily understood and amplified in small caps. But now that the Bear has officially arrived, the bigger question is how long it will be here.

To answer this question I took a look at the past two economic cycles to see if there were any similarities. The last two Bear Markets in the Russell 2000 Value occurred in 1998 and 2002. The duration from peak to trough was four months and six months, respectively. In each cycle the Russell 2000 lost just over 30% before rebounding. In 1998, the less severe and shorter of the two cycles, the gain one year after the bottom was about 18%. In 2002, the slightly deeper and longer of the downturns, the gain one year after the bottom was about 55%. Currently, the Russell 2000 Value has dropped approximately 23%. We are in the eighth month of the decline, longer than either of the two recent declines, yet still less severe than either of them.

The hardest part, of course, is interpreting historical information and its relationship to where we are today. To do this we most look at each of the situations in their relative context. In broad terms, 1998 was

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Caleb Sevian profile picture
Caleb Sevian is a portfolio manager for the University of Colorado Foundation ( where his responsibilities include manager selection, due diligence, asset allocation, and the development and maintenance of their risk management program. Prior to joining the foundation in 2008, Caleb was senior portfolio manager and president of Tenet Capital. While at Tenet Capital, Caleb was responsible for developing the proprietary quantitative factor models utilized to manage the firm's equity portfolios. The models Caleb developed were designed to uncover the intrinsic value of a company along with the company's ability to increase value through earnings growth. In addition to the quantitative equity models Caleb developed, he also created a quantitatively driven asset allocation model used to optimize asset classes based on Post Modern Portfolio Theory combined with a proprietary econometric model and served as a consultant to develop proprietary multiclass asset allocation portfolios for institutional clients. Prior to Tenet Capital Caleb spent eight years at Victoire Finance et Gestion, a European multi-strategy hedge fund, developing his skills as a fundamental investor. While at Victoire he served as the Senior Portfolio Manager and Chief Operating Officer. During his tenure at Victoire Caleb also acted as a proprietary trader for the long/short equity trading desk at the Fund. Caleb earned his B.A. in mathematics from the University of Colorado, Boulder.

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