A History of Bear Markets

Amidst the global coronavirus pandemic and ensuing uncertainty, the Dow Jones Industrial Average entered a bear market on March 11, 2020. It was the first time in more than a decade that the market did so. Nasdaq and the S&P 500 followed into a bear market on the next day. While this bear market has the makings of one of the most severe periods in the history of bear markets, it’s certainly not the first time the United States has dealt with such a situation.

Successful investing includes knowing the history of the market and how to read trends. In fact, bear markets can provide an interesting opportunity for savvy investors.

Key Takeaways:

  • You can define a bear market as a sustained period of downward-trending prices in stock. These periods are frequently triggered by at least a 20% decline in stock prices from near-term highs.
  • Bear markets often (but not always!) have a corresponding recession as well as high unemployment rates.
  • Key bear market dates include September 1929 to June 1932, which coincided with the Great Depression, and October 2007 to March 2009, which coincided with the Great Recession.
  • Recovery from a bear market often leads to a new bull market.
  • Bear markets can offer great buying opportunities for long-term investors while prices are depressed.

What Is the History of Bear Markets?

Image via Flickr by rednuht

Defining Past Bear Markets

One way bear markets have been defined in the past is by looking at when stocks fell for a sustained period for an average of at least 20% off their high. Another way to define bear markets is to look at periods when investors are more risk-averse and less risk-seeking.

S&P 500 Bear Market History

The S&P 500 P/E, or Price to Earnings Ratio, has historically been significantly lower during bear markets. Confident investors can increase the P/E ratio, and make stock valuations go up.

In general, P/E ratios tend to remain at or near historical or industry levels when company meet (or modestly exceed) expectations for earnings. P/E ratios can expand when companies report strong earnings that are unexpected, as investor demand will rise and drive up prices of the company’s stock. On the other hand, P/E ratios can contract when companies report losses or earnings that are lower than expected, as investor demand may fall and in turn drive down stock prices.

List of Bear Markets in Recent History

  • September 1929 to June 1932: When the stock market crashed on October 29, 1929, it marked the Great Depression’s start, sparking the most famous bear market to date in American history. In less than three years, the S&P 500 fell a lot more than 80%. The market didn’t get back to its previous peak until 1954.
  • May 1946 to June 1949: After World War II ended and a postwar surge in demand faded, Americans started putting money into savings. Stock prices peaked before beginning a long slide, and in 1948, the economy entered an inventory recession.
  • December 1961 to June 1962: April 1961’s Bay of Pigs attack, coupled with October 1962’s Cuban Missile Crisis, sparked an abundance of Cold War jitters. A loss on the S&P 500 and a brief bear market ensued.
  • November 1968 to May 1970: After Richard Nixon was elected president following significant national tumult, a weak economy that included a mild recession and relatively high inflation came together with the tense atmosphere to create another bear market.
  • January 1973 to October 1974: The Yom Kippur War in Israel and the Arab oil embargo that followed triggered a spike in energy prices and a long recession. The inflation rate went above 10% during this time.
  • November 1980 to August 1982: The Federal Reserve raised the interest rate to almost 20% after almost 10 years of sustained inflation, and the economy went into a recession.
  • August 1987 to December 1987: Following a long bull run, the market got swamped by computerized ‘program trading,’ and that led to the Black Monday crash. Fears of a devaluation of the dollar also contributed to a fall in the S&P 500. However, the market bottomed out fairly quickly by the beginning of that December, and another bull run began.
  • March 2000 to October 2002: After soaring stock prices and speculation on new internet companies, the dot-com bubble burst.
  • October 2007 to March 2009: The housing bubble burst in 2007, sparking a rise in mortgage delinquency that spilled into the credit market. Wall Street giants started toppling in 2008. The market fell to its lowest levels since 1997 by February.

Bear Markets in History, With and Without Recessions

Bear markets do not always come with a corresponding recession. Some of the above bear markets, for instance, were not accompanied by economic recessions. Though there was a brief pullback in the early 1960s, the six-month period did not trigger a full recession. Likewise, while the stock market crash of 1987 led to a ton of momentary panic, the drop only lasted for three months.

Other historical bear markets saw the stock market decline start before the official beginning of a recession. The famous dotcom crash of the early 2000s kicked into gear thanks to investors losing confidence in stock valuations reaching new historic highs. That sent the S&P 500 tumbling, with a brief period of recession taking place in the middle of the period that lasted for just over two years.

The Worst Bear Markets

Two of the worst bear markets in recent history did fall roughly in sync with recessions.

The Great Depression

First, of course, was the Stock Market Crash of 1929 and the subsequent Great Depression. That grinding bear market lasted nearly three years. A few different factors came together to cause a stock market sell-off:

  • The Smoot-Hawley Tariff Act.
  • A valuation bubble created by rampant speculation.
  • The restrictive monetary policy put in place by the Federal Reserve to rein in that speculation.

The Great Recession

The 2007 to 2009 bear market lasted for over a year after the United States economy slipped into recession in 2007. A spiraling subprime mortgage crisis happened at the same time, and more and more borrowers were not able to meet scheduled obligations. This all came to a head in the September 2008 financial crisis.

Systemically important financial institutions, or SIFIs, found themselves in danger of insolvency. Only unprecedented interventions by central banks across the globe averted a collapse of the global economy and financial system. Through a process known as quantitative easing, or QE, huge injections of liquidity into the financial system rescued the world economy, and the prices of financial assets like stocks were pushed to record low levels.

Recovery After Historical Bear Markets

After bear markets, bull markets tend to follow. Bull markets can last for years, although much of their gains usually come during a rally’s early months.

Let’s take a look at some historical examples for perspective. Following the two and a half year bear market, the S&P 500 hit a bottom of 777 on October 9, 2002. The following month saw a gain of 15%, with a total 34% gain over the span of the next year.

Likewise, after the S&P 500 bottomed out at 683 on March 9, 2000, it started on a huge ascent. The market just about doubled in the next 48 months.

Investing During Bear Markets

Though it can be tempting to flee to cash during a bear market, investors who do so can miss the early stages of a market recovery. As shown in the above examples, historically these early stages offer the largest percentage of returns per time invested.

It can additionally be challenging to time the beginning of a new bull market, which might make investors thinking about moving out of stocks entirely during a bear market to reconsider that action. Then there’s the phenomenon known as a bear market rally. During these periods that take place in the midst of a bigger downward trend, equities have a short-term revival. These rallies can make it difficult to determine the actual current trend.

While we aren’t offering advice, it’s good for you to know that bull markets often last a lot longer than bear markets. Bull markets can also generate moves of much greater magnitude than their bear market counterparts. As a result, a bear market can be a good opportunity for a long-term investor to buy. However, investors must keep in mind that it can take years for the opportunity to pay off.

If you have cash, you can consider buying opportunities during bear markets. Professional investors tend to consider stock prices during bear markets to be ‘on sale’ and so turn to buying during these periods.

Investors considering jumping in may keep a useful rule of setting an investment mixture according to risk tolerance in mind. Then, investors can re-balance to buy low and sell high. Additionally, investors try not to cut contributions to retirement accounts during down-market periods. The benefit in the long run comes from buying new shares at lower prices, therefore achieving a lower net average purchase price.

Understanding the differences between bull markets and bear markets will allow you to develop strategies to take advantage of price fluctuations that have happened historically in both types of markets. You’ll be ready for whatever kind of market comes your way.