And the Bear Rolls On

So it's official. With the market making new lows basically all this past week, and down some 25% just since Barack Obama took office about six weeks ago, we are now officially in the worst bear market in history, other than the one that started off the Great Depression. How's that for some fun and foreboding company, huh? But it's true: with Tuesday close at 696 and change for the S&P 500, the broad market measure is now down 55.5% on a closing high to closing low basis since the high of 1565.15 reached on October 9, 2007. Only one other bear market in history has seen the broader market drop more than 55%, and that was from September 7, 1929 through July 8, 1932, when the S&P plunged a staggering 86.2% from its peak, taking until basically the mid-1950s until the index recovered to its 1929 levels.

So, given that historical parallel and the market's seeming unending desire to move lower and with bottom in sight, I'm hearing more and more people asking just how low this can go, and how the major indices' recent drop really compares to the beginning of the Great Depression and some of the other worst bear markets in history. And on that question, I give you the following chart:



This is a graphical comparison of what are generally thought to be the four worst bear markets in any market in history: the Dow during the Great Depression in the U.S., the Japanese Nikkei's collapse since its own real estate and financial bubble peaked in the late 1980s, the Nasdaq collapse at the end of the dot-com bubble in the late 90's / early 2000s, and the S&P during the current financial crisis in the U.S.

There are a few things I really like about this chart. First and foremost, it puts all four of these historical bear markets on the same scale. With the Nasdaq topping out at around 5100, Japan's Nikkei at around 40,000, the Dow back in the Great Depression around 30, and the current S&P at 1565 and change, it would be impossible and not very visually helpful to try to find a way to put all four of those indices onto one chart at their actual nominal values. So this chart simply starts at the top at 0%, and then every tick downward in any of the four graphs represents simply a percentage slide from that index's peak. This way, you can see the relative performance of the major market benchmarks during these periods all on the same chart in a way that makes it very easy to compare between them.

Similarly, the above chart is also good because it not only uses a comparable scale on the vertical axis but also on the horizontal -- then number of years. It simply starts all four indices at the top left corner, at time zero and at their respective peaks, and then shows you how far each dropped on a constant-time basis, all in constant years as shown along the bottom of the graph.

So what can we glean from this chart? A few things. For starters, I will just point out generally that the current market tumble -- the blue line on the chart above -- looks generally similar to each of those other massive bear markets experienced during this century. Not that that is supposed to make everyone feel all better -- "Hey don't worry, this is just like the Great Depression and the dot-com implosion!" -- but my point is, this isn't some calamitously worse drop in the markets than what we've seen before during the worst periods of weakness in the equity markets in this country and around the world. My point is, if you look at each of the four historical indices depicted in the chart, all four of them fell pretty precipitously during the first year of the decline from the highs. In fact, technically speaking, at the end of Year One, all three of the post-bubble Nasdaq, the post-bubble Nikkei and the Great Depression Dow indices all fell more than the current S&P during the first year following their peak. But it is here now in the first six months of the second year when the current market is playing some catch-up, now surpassing the Nikkei's 18-month decline and basically inching right up next to where we were in early 1931 just a year and a half into what is now called the Great Depression. So we're still looking at market declines over the past couple of years that are clearly worse than most bear markets we have experienced, but right in line with the four worst bear markets of the past century.

The other aspect of this chart that I find very telling is the time aspect. One thing I can't help but notice is that in two of the three previous Great Bears, the absolute bottom of the markets happened fairly early within the cycle, at least fairly early in terms of the total scale of this chart. The green chart -- the post dot-com Nasdaq -- reached its absolute bottom about 2 1/2 or 2 3/4 years after reaching its peak (assuming it does not eclipse those 2002 lows this time around at some point). Similarly, you can see from the gray line on the chart that the Dow in the 1930's reached its absolute bottom just short of three years after peaking. Now, the Nikkei in Japan is the exception (if you can call one in three an "exception") in that here after 19 years they are still making fresh lows as we speak, but Japan is universally chided for ignoring its banking crisis for far too long and thereby extending its recession far beyond where it otherwise needed to last to. So the two good examples we have of mega bear markets from this country both show the absolute bottom -- the lowest the market ever gets in that bear cycle -- both occurred just short of three years following the peak. It's actually pretty amazing if you look at the chart, how much the green, grey and red graphs all look more or less exactly the same as we approach the 3-year marker on the graph.

So, if this megabear holds to form, we can probably expect the market to make its absolute lows somewhere before three years following the peak, which was September 2007. So we would be looking at the lowest of the low to occur somewhere around summer of 2010, or another solid year and a half still from now. In terms of magnitude, using just these three historical bears as an example, the Great Depression peaked at down 86% from the top, the Nasdaq down around 75%, and the Nikkei down around 63% near the third anniversary of the peak. We're already down over 55% on a closing basis, so the big question is how much further we fall from here. Do we stop around the 55-60% range, meaning most of the losses are already in the market, or do we drop another 10-20% from the original level of 1565 on the S&P to get us more in line with the Great Depression and the Nasdaq dot-com blowup? If it's the latter, we are in for another bad year and a half, as that would mean another 150-300 points off of the S&P 500, which as of Tuesday's closing low is at 696 and change. It's hard to conceive of what S&P 300 or S&P 400 would look like in terms of individual stock prices, but the thought of slowly moving to that point over the next 18 months is enough to make a guy truly ill.