NEW LOW OBSERVER

Bear Market Declines

“Historically, bear markets tend to last 1/3 to ½ as long as the preceding bull markets. Since this bear market is in the process of correcting the 17-year bull market of 1949 to 1966, a rough rule-of-thumb would be that the bear market could last five to eight years (and I will be optimistic in that I hope it lasts nearer to five than eight). However, the interesting part of the picture is that with four years out of the way, the worst the Dow Industrials have done is to decline from their 1966 peak of 995.15 to their 1966 low of 744.32, a total drop of 251 points (Russell, Richard. Dow Theory Letters. January 7, 1970. Letter 449. Page 1.).”

As a “rule-of-thumb”, the 1/3 to ½ (in terms of duration) extent of a bear market decline is pretty good and very consistent. The examples are many and the data is clear. First, let’s take the 1966 peak as the beginning of the bear market. From that time, the ultimate low in the stock market was December 1974. This was eight years from the 1966 peak. True stock market enthusiasts would argue that the bear market for stocks did not end until 1982, when the Dow Jones Industrial Average “permanently” broke above the mythical 1000 level and never looked back. Die hard market historians make a credible claim that the bear market did not end until the inflation-adjusted low achieved in 1978 or 1982.

However, based on the work of Jeremy Siegel (“The Nifty-Fifty Revisited: Do Growth Stocks Ultimately Justify Their Price?” [PDF download]), even if a person had bought the “Go-Go” or “Nifty Fifty” stocks at the 1966 or 1971 peak, investors would have achieved exceptional gains in spite of the high inflation rates until 1982 (by the end of 1995, in support of the “buy-and-hold” strategy).

The amount of time that passed from the 2007 peak to the 2009 low was 18 months. This was 38% of the bull market that preceded it from 2003 to 2007. The decline was severe and few would be in the position to stomach the extent of the decline, however, the rebound was inevitable and equally as vicious.

Our default view generally gravitates towards the stock market crash of 1929 to 1932. Even our cautiously optimistic analysis should be thwarted by one of the worst bear markets in history. However, taking note of the fact that the bull market “officially” began in 1921 and unofficially in 1907 or 1915, it is clear that the rule-of-thumb holds up.

Market enthusiasts will often retort that the bear market ends when the market recovers beyond the previous peak as the majority of investors buy near the last market peak. This is a valid point and yet, investing is made better by understanding that the majority is usually wrong and therefore should fight the urge to commit 100% of their investment capital as the market climbs higher and ensure that saved funds are 100% invested as the market falls. There are many benchmarks for determining how low is low enough before 100% of funds are committed so being close enough is better than succumbing to the fear of a falling market.

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