Friday, November 21, 2008

Bear Market History

THE BEAR’S RECORD BOOK
The first step to creating that composite model to see what the future may look
like is to glance over past bear markets. You’ll find this of great help as
reference material in the years to come (and especially for all the bear
markets ahead).
No single past model exactly applies to today.
My list begins in 1900, because this was the first bear market after Dow
created the DJIA in 1897. Panics and crashes from earlier times also have
things they can teach us, but prior to 1897 market statistics are vague, so
anything earlier can only be referred to in a general sense:
1900 DJIA declined 31.8%. Duration of bear market: 12 months. Crash came
in December 1899. Bear market low in June 1900.
1903 DJIA declined 37.7%. Duration: 10 months. Crash occurred in
November 1902. Bear market low in September 1903.
1907 DJIA declined 45.0%. Duration: 10 months. Had two crash phases, the
first in February (DJIA fell 21.8% in this first phase); rallied in March
and April.
The second crash was July to November, a 4-month fall known historically as
the ‘‘Panic of 1907.’’ A bull market started at once after the second crash.
Stocks lost almost 50% (many much more) from the bull peak. A further
fall was prohibited by the fact that business did not fall much further after
the October economic collapse. Business coasted in a top area for 8 months
after the start of the first market crash, then, suddenly and without an alarm,
plunged down almost vertically in the midst of the second market crash.
Business indicators hit bottom 3 months later, stayed there for 4 months,
then began a healthy recovery:
1909 DJIA declined 26.2%. Started in November 1909, with the crash phase
in February 1910. The bear market low came in July 1910. Duration: 8
months.
1912 DJIA declined 23.5%. Duration of bear market: 26 months. Crash came
in June 1913, but bear had started in November 1912. Bear low came in
December 1914. Since the stock market was closed for 4 months in 1914
by the war, a true picture of the decline here is impossible. One source
says it was 36.3%. But I’ll take the more conservative published DJIA
figures as my base.
1917 DJIA declined 40.1%. Duration of bear market: 13 months. Crash
phase came in December 1916. Hit bear market low in December 1917.
1919 DJIA declined 46.6%. Duration: 21 months. Three crash phases. Initial
crash November 1919 to February 1920 (DJIA fell 25% in this first
History of Bear Markets 21
phase). Second crash in late 1920. Final crash in summer of 1921. Hit
low in June.
Business topped out slowly during the first market crash, then coasted rather
indecisively just below its top area for 6 months after the crash. Then it plunged
sharply, right after Labor Day, 1920. A depression lasting 1 year followed.
Business then recovered simultaneously with the stock market. The year 1921
was notable for a downswing that lasted 6 months nonstop, the second longest
downswing in bear market history.
1923 DJIA declined 18.6%. Duration of this baby bear market: 7 months.
1926 DJIA declined 16.6%. Duration of baby bear market: 2 months.
1929 DJIA declined 90.0%. Duration 34 months. Six successive market
crashes comprised this famed bear: (1) September to November 1929
(DJIA fell 40% in this first phase). (2) April to June 1930. (3) September
to December 1930. (4) March to May 1931. (5) July to January 1932.
(6) March to July 1932. A new bull market then started immediately, as
did a business recovery.
Business had topped out mildly, a month before the first crash; a gradual mild
decline continued to April 1930, then fell sharply into a depression simultaneously
with the end of the 1930 stock market rally. The business decline
halted in December 1930, stayed level for 6 months, then plunged again in
steep economic decline that didn’t lose its downward momentum for a full
year, until July 1932. Business improved intermittently thereafter but still
remained at depression levels through most of the 1930s except for a short
recovery in 1936–37.
1934 Rarely included among bear markets. But a fall of 24.1% in the DJIA
gives it a deserved berth here. Duration: 9 months. Then the market
took seven more months to get back up to where 1934 began.
1937 DJIA declined 51.8%. Duration: 56 months. Five crash phases: (1)
August to November (DJIA fell 40% in this first phase). (2) February
to March 1938. (3) January to April 1939. (4) May 1940. (5) October
1941 to April 1942. Business peaked out and fell violently, simultaneously
with stocks. Economic indicators bottomed out 9 months
later (May 1938). The recovery began mildly at first, but was later
boosted by the World War II production boom which eventually
lifted the country out of the Great Depression of the 1930s.
The period 1941–42 contained the longest bear market nonstop downswing (71
2
months) in history. Certain analysts call this two separate bear markets, one
from September 1937 to March 1938, and the second from May 1940 to April
1942. If you are simply looking at market action this view may be correct. But
22 Bear Market Investing Strategies
if you take a wider view within the context of the depressed mood of the times,
then it can be viewed as all part of a single bear market.
1946 DJIA declined 24.6%. Duration: 37 months. There was only one crash
phase (August–September 1946), and the bottom was hit within 4
months. But the market moved sideways for almost three years and
tested the 1946 low area three times. The final time was in 1949, after
which the market rose almost without interruption for the next 12 years
(160 to 741 in 1961).
1953 This was a very small bear market, but, as it was caused by war (Korea)
uncertainty, I include it here. DJIA declined 13.9% (295 to 254).
Duration of this quasi-bear market: 9 months.
1957 DJIA plummeted 106 points (522 to 416) for a 20.3% fall. Duration: 6
months.
1960 Opinions differ on whether this was a real bear market. But Dow
Theory signals were given, so it is included here. DJIA declined
18.0%. Points lost: 124. Duration: 10 months.
1962 DJIA declined 29% in 6 months. Extent of 1962 damage: the first crash
phase of 1929 lost 40 billion dollars. The 1962 crash lost over 100 billion
dollars. Even if we adjust those values in terms of 1929 purchasing
power, the 1962 crash still lost one and a quarter times as much as in
1929.
1966 Market plunged from 1001 to 735 in just over 8 months. This was the
end of the postwar super-bull market. At this point, the whole atmosphere
of the stock market changed. A new factor entered the investor’s
reasoning. Not only must he now assess the direction of the economy,
he must also consider government monetary intervention, which might
make him think he was making a profit, when in fact, in real value
terms, he was not. We will discuss this at greater length in Chapter 19.
1968 This was a long, drawn-out bear market. The DJIA declined from a
high in December 1968 of 994, down to a low of 627 in May 1970. This
was the first of the new-era bear markets, caused not so much by a
simple downturn in business but by currency woes.
1973 This one was scary! From a high of 1067 in January 1973, the market
slid relentlessly down to its final low of 570 in December 1974. Its
catalyst was the oil crisis. For the first time in American stock market
history, a foreign power, or group of powers, were able to precipitate an
economic slowdown. We had entered a new level of globalization after
which the world would never be the same.
1977 DJIA fell fairly gradually, though gathering some momentum as it went
from just over 1000 in January 1977 to a low of 736 in March 1978.
Nothing dramatic caused it; rather more of the same of the past decade:
increasing oil prices with dollar stability problems steadily worsening.
History of Bear Markets 23
TEAMFLY
1981 This bear snuck up on people. DJIA made a rare quadruple top that
convinced most investors it was building strength to break through.
DJIA fell from 1025 in April 1981 to a low of 770 in August 1982, or
255 points. A mere 17-month-long bear, it led to a recession which was
more severe than the stock market fall would indicate.
1984 Though this is not even considered a bear market by most, it scared a
lot of investors because it broke below a giant support area and
appeared to be heading back to the 1000 level, whence the bull
market of late 1982 and all of 1983 had come. It fell 16%, from 1295
to 1080 in 7 months.
1987 This was a heart-stopper for the very reason that there was no apparent
economic reason for it to occur. There were two catastrophic days of
multi-hundred point drops, with one of those days being the largest
one-day point drop in history. It came about because of computer
programming (explained earlier), computer insurance schemes, and
the globalization of markets. It was history’s first simultaneous global
bear market where all major world markets were hit badly at the same
time. Australia was among the hardest hit, Japan among the least, but
all had considerable damage. DJIA fell from 2747 to 1616 (i.e., 36.1%),
in less than 2 months. It took nearly 2 years to surpass its prior high.
1990 This was the direct result of Iraq invading Kuwait, and was halted when
the US launched Desert Storm. DJIA declined 17%. Duration: 4
months. This bear market, along with that of 1987 are the shortest
bear markets in history.
2000 By October 2001, the Nasdaq was down a whopping 72% though the
DJIA was only down around 25%. But most worrying, well before the
September 11, 2001 terrorist attack, was that the underlying economic
health of the US and most world economies showed increasing signs of
weakness. It is already clear that this bear market has damaged the
broader economic health of all major economies, more than any other
bear market in the last 60 years. But more of this later in our predictions
chapter.

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