How bad are bear markets and what we might expect this time
In spite of recent market strength, the evidence that we entered a bear market in 2015 continues to pile up. We thought it might be helpful to take a look at the past for clues about what to expect this time.
Below is a table of all the major bear markets since 1929. (We left out a few small ones from 1935 until 1944—not an environment we expect to repeat.) The median bear market lasts 16 months and creates a loss of 34%. Like many medians, you will notice that these market periods are either much worse or better than average, and only two come close to the “typical” bear. What’s the difference between the milder ones and the nastier examples?
| Bear Markets | ||||
| High | Low | Maximum Loss | Duration | |
| 1929-1932 | 32 | 4 | 86.2% | 30 Months |
| 1937-1938 | 19 | 9 | 54.5% | 13 Months |
| 1946-1947 | 19 | 14 | 28.5% | 12 Months |
| 1956-1957 | 50 | 39 | 21.6% | 15 Months |
| 1961-1962 | 73 | 52 | 28.0% | 6 Months |
| 1966 | 94 | 73 | 22.2% | 8 Months |
| 1968-1970 | 108 | 69 | 36.1% | 18 Months |
| 1973-1974 | 120 | 62 | 48.2% | 21 Months |
| 1980-1982 | 141 | 102 | 27.1% | 21 Months |
| 1987 | 337 | 224 | 33.5% | 4 Months |
| 2000-2002 | 1,527 | 777 | 49.1% | 29 Months |
| 2007-2009 | 1,565 | 677 | 56.8% | 17 Months |
Scanning the list we can see that four times since the mid 1930’s, the market has fallen about 50%. The others create drops of 20% to 36%, with the majority in the 20’s. It turns out that the mild bear markets (less than 30%) tend to occur when the economy either avoids a recession or the recession is very shallow and brief. Most of those that stopped short of a 30% drop developed without a recession in the US.
If the current correction develops into an actual bear market, we are expecting the milder variety. This is our assumption for two reasons, which we have mentioned before, but deserve to be repeated. 1) The biggest and most dangerous investment mistakes have occurred in the Emerging Markets, not here in the US. And 2) the commodity bust creates many more winners here in the US than losers.
Both of these factors could allow the US to escape a recession even though the stock market continues to have a tough time of it. How “tough” we can never know in advance. But we will keep you informed as our market assumptions evolve.
Best regards,
Daniel A. Ogden