Wednesday, October 22, 2008

A Historical Look at Bull and Bear Markets

With the stock market once again rolling over and playing dead on Wednesday, I went looking to compare the current bear market with historical bear markets in an attempt to put this past year of market shittiness into perspective. I share with you the following chart, which I cobbled together from a number of different sources on the web, including with my own trusty Texas Instruments calculator, and some cold hard math. Following is a chart of all of the bull and bear markets recorded in the S&P 500 Composite index -- the broad index of roughly the 500 largest companies traded in the U.S. It shows the percentage gain from closing bottom of the previous bear to closing top on the S&P 500 Comp for each of the bull markets, along with the length of time measured, as well as the percentage drop from closing top of the previous bull to closing bottom for each of the bear markets recorded going back to World War I. In fact there were several financial and economic slumps, some of them quite massive and in a few cases even requiring what was then the major U.S. stock exchange to shut down for days on end that occurred during the 1800s, but with technology, regulation and markets what they were back then, I think using just the 1900s to be a more useful example (and also the data is much more readily available during that time period). So here is the chart, take a look and let's see what conclusions we can draw from it:

S&P Composite Price Index Bull and Bear Markets 1914-2008

Market TopIndex High% IncreaseMarket BottomIndex Bottom% Decrease
10/9/2007 1565.15 101.5% 10/10/2008 899.22 -43.5%
03/24/2000 1527.46 59.6% 10/9/2002 776.76 -49.2%
07/17/1998 1190.58 304.3% 10/08/1998 957.28 -19.6%
07/16/1990 369.78 67.1% 10/17/1990 294.51 -20.4%
08/25/1987 337.89 233.1% 12/04/1987 221.24 -34.5%
11/28/1980 140.52 61.7% 08/12/1982 101.44 -27.8%
09/21/1976 107.83 73.1% 03/06/1978 86.90 -19.4%
01/05/1973 119.87 73.0% 10/03/1974 62.28 -48.0%
11/29/1968 108.37 48.0% 05/26/1970 69.29 -36.1%
02/09/1966 94.06 79.8% 10/07/1966 73.20 -22.2%
12/12/1961 72.64 86.4% 06/26/1962 52.32 -28.0%
08/02/1956 49.75 267.2% 10/22/1957 38.98 -21.6%
05/29/1946 19.25 157.7% 06/13/1949 13.55 -29.6%
11/09/1938 13.79 62.2% 04/28/1942 7.47 -45.8%
03/10/1937 18.68 131.8% 03/31/1938 8.50 -54.5%
07/18/1933 12.20 120.6% 03/14/1935 8.06 -33.9%
09/07/1932 9.31 111.1% 02/27/1933 5.53 -40.6%
09/07/1929 31.86 408.9% 07/08/1932 4.41 -86.2%
07/16/1919 9.64 60.7% 08/24/1921 6.26 -35.1%
11/20/1916 10.55 59.1% 12/19/1917 6.00 -43.1%

OK. First a couple of general trends I noticed right away here. Interestingly, the end of wars, despite the general feeling of peace and happiness that this might instill in the average American, has not been kind to the stock market. World War I ended in 1919, and that began a two-year bear that knocked more than 35% from the S&P 500 Composite. World War II ended in 1945, and the period from mid-1946 to mid-1949 saw the S&P tumble nearly 30%. The U.S. pulled out of Vietnam for good in the 1973-74 timeframe, and that period of time also saw one of the worst bear markets in U.S. history, with stocks falling 48% over a 21-month period. If history is any guide, the likely withdrawl from Iraq that future president Barack Obama says he plans will not be greeted kindly by investors in U.S. equities.

Other trends. The current bear market facing investors is definitely among the very worst in a century. In sheer magnitude of the drop from the highs, the current plunge of 43.5% in the S&P closing value ranks as the 5th largest of the 20 bear markets recorded since the nineteen-teens. But even that doesn't tell the whole story. The bear market of 2000-2002, caused directly by the blowup of the tech/internet bubble, saw stocks shed nearly 50% of their value, but that bear from peak to trough lasted more than 2 1/2 years. The 1973-74 bear market with its drop also of just under 50% took a year and nine months to bottom out. The 1938-1942 bear is historically regarded as one of history's worst, but again because it lasted nearly 3 1/2 years until the selling finally subsided for good.

The current bear, conversely, has lasted almost exactly one year. Within a week or so, the top to bottom drop of over 43% in the S&P 500 has occurred all within just one year. It's hard to believe stocks could drop that much over just a one-year period, but there is a historical precedent. If you look at the chart at the bear market of 1937-1938, there you can see a strikingly similar move, with the broader stock index plummeting more than 54% in more or less exactly one year. This of course was the middle of the Great Depression, in particular when things had appeared to finally be picking up with the economy for the first time in a decade, and as a result President Franklin Roosevelt had actually pulled back some of the spending on the New Deal and other related efforts. The consequences proved dire as stocks quickly dropped back to their 1935 lows in just twelve months.

The thing about that 1937-8 bear market though that is most different from the current market is where it began. In 1937, the S&P was at 18.68, having rallied over 131% from its 1935 bear market lows of just over 8 and still a good 50% above the previous bear market high from 1933 of 12.20 on the S&P 500 Composite index. In 2007, however, the bull market high of 1565 is more or less exactly the same as the bull market high from 2000. In other words, in 1937, stocks had advanced a full 50% higher than their previous bull market highs from just four years earlier before embarking on their worst one-year plunge of the century. In the current market, however, stocks had just advanced to a shade above the previous bull highs from eight years earlier before once again cratering 43% (and counting). This makes the current bear market arguably even worse than that we saw in 1937-8, because back then in a year stocks tumbled from 50% higher than their previous highs, whereas here what has happened in 2008 looks and feels more like a double-top of the 2000 market highs than a dropoff from a new higher high reached in 2007.

For those of who who think the sky is falling, however, don't despair. Check out 1929-1932 on the chart. This move, begun by the great stock market crash of 1929, pushed stocks down a jaw-dropping 86% over nearly three years of sickening panic selling. By contrast, the Dow would have to get to roughly 1980 or so before we reached that point on its current scale, and that my friends is simply not going to happen. That why they call it the Great Depression, and I do not believe it is improper to say that something on that scale is highly unlikely to ever happen again, with the regulation and the globalization across the marketplace today, and just given the sheer size of the global economy.

There are two other things I can't help but notice from this data I found and that I think are very instructive points to live by. The first is simply to be sure to notice the absolute, stark regularity of bear markets. They're just like economic recessions, and up until the current president took office, everyone seemed to always understand it: they happen extremely regularly, and in fact are a normal and necessary part of the whole process of economic and equity expansion. Just look at the dates of all the bear markets that have occurred since World War I. 1916, 1919, 1929, 1932, 1933, 1937, 1938, 1946, 1956, 1961, 1966, 1968, 1973, 1976, 1980, 1987, 1990, 1998, 2000 and 2007. Two in the 19-teens, one in the 1920s, four in the 1930s (Great Depression, no shit), one in the 1940s and another in the 1950s. Three in the 60s, and then two in the 70s and another two in the 80s. Two more in the 1990s and now two again in the 2000s. How's that for regular? Over the past hundred years, 20 bear markets, spread fairly consistently and linearly throughout the market's history. That averages out to a bear market -- a drop of roughly 20% or more in stock prices from peak to trough -- every five years or so. Every five years, stocks lose at least 20% from top to bottom of a given move. It doesn't happen like clockwork every single five years, but just in the past four decades we have seen exactly two bear markets in each. And that's all we're looking at right now here in 2008, the second of two bears during the 2000-oughts. Unfortunately our current administration does not seem content in accepting the reality of this consistency in the stock market, but the consistency and regularity is there nonetheless. Bear markets happen, and they have to happen in order for the whole market system to work. Bear markets are how the weak, shortsighted and pessimistic investors are shaken out of the market, to be replaced by the strong, longer-focused and more optimistic types that fuel the next bull run. And those bull runs simply cannot happen without the bear periods mixed in. And stocks always come back. Always.

The other thing I can't help but notice -- and this should not be surprising to anyone out there, really -- is that some of the worst, sharpest bear markets have tended to follow the biggest bull runups immediately preceding them. Obviously the Great Depression is the best example of all of this phenomenon, with stocks soaring an eye-popping 409% from 1921 through 1929 until the bubble popped in a huge way and led to the massive 86% decline in stock prices over the following three years of trading action. The next biggest percentage gain in a bull market on that chart occurs all the way up in 1987, where the period from 1982-1987 saw U.S. stocks rise over 233%. The result? A sickening bear market I didn't even mention above, but one that saw stocks slump 34.5% over a period of less than four months. This of course included the well-known Black Monday in 1987 when the S&P 500 declined by over 22% in one day, a day that I myself and most people old enough to give a crap back then will never forget. You think this month's been bad? The biggest daily declines we've seen in October 2008 have been rouhgly 8%, which has happened twice now (with a nice 9% gain day stuck in between, thankfully). Imagine one day when the market fell nearly three times as much as the worst day in October. That my friends was not a good day, and was easily the closest we've ever come in any of our lifetimes to stories of stockbrokers jumping out windows as is often retold from the great crash of 1929.

Unfortunately, the next largest bull market runup on the chart occurred from 1990 to 1998, where in U.S. stocks soared more than 300% over an eight-year period. Of course massive changes in technology and infrastructure led to increased productivity for U.S. companies that had been heretofore unprecedented to say the least. Fueling that huge gain was also the decreases in regulation of several industries, notably the financial services sector, created and pushed by the Clinton administration. But whatever the cause, the end result was still a 300% gain in equities in less than a decade. And now since then the broader S&P 500 index has seen declines of 49.2% and 43.5%, with stocks now sitting below where they were in October 1998 when the bear market of 1998 ended abruptly. Whether than has been enough carnage now to "pay the piper" for the excesses of the 1990's bull market still remains to be seen, but seeing all these numbers laid out in the chart above I think gives some solid perspective to the true magnitude of this year's stock weakness from the eyes of market history. And if nothing else, it really is amazing how many of the more recent bear markets have ended in October. If the lows from two weeks ago hold, that will be four consecutive bear markets that saw the eventual lows put in sometime in October, with Black Monday in 1987 also occurring during mid-October in the bear imemdiately preceding that one. So if history is any guide, we are at a real inflection point in the markets as things continue to rock n roll on Wall Street today.

Cole Hamels against Scott Kazmir tonight in Game 1 of the World Series. 8pm ET on Fox. Here's hoping that Joe Buck and Tim McCarver's plane crashes runs out of fuel before making it to the game so they have to bring in Harry Kalas, easily the greatest announcer in the history of baseball, to call the Phillies' second coronation in their illustrious 126-year history.

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Blogger Snuffy said...

Tim McCarver lives in Sarasota so good luck on the plane crash. Might want to ask for a boat to hit the Sunshine Skyway Bridge instead.

12:12 AM  
Blogger Champ said...

Good write as always Hoy! Thanks for taking the time.

12:47 AM  
Blogger Astin said...

After the tech boom, interest rates were slashed to try and stave off a collapse. Low interest rates led to financing of things that shouldn't have been financed... like homes for people who couldn't afford them, businesses that made no sense, loans that wouldn't have been applied for with higher rates, etc.. Then the rates were kept artificially low to spur this "growth". Now the bottom has fallen out, and this is the result. Which is why this crash happened after we reached those heady dot-com heights. We never had proper contraction from the tech boom, it was stalled through government intervention, and this is the result.

They're trying again now, but I don't have a clue where they expect it to help. Best case, they slow the collapse and give a cushion for when it hits bottom. The banks are taking their forced charity and sitting on it instead of lending it out, because they know there's still some dropping to be done.

12:54 AM  
Blogger Hammer Player a.k.a Hoyazo said...

Well, so much for the lows from two weeks ago holding up.

So sick.

2:53 AM  
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