A Little More History About Bear Markets
October 16, 2008
Since 1947, The Dow Jones Industrials has experienced two multi-year periods of see-sawing to nowhere: 1961-1982 and the period since January 2000. From a low of 163 on May 17, 1947 to a peak of 735 on December 13, 1961, the index of 30 blue chips climbed at a pace of 10.9% per annum. I like to use December 13, 1961, the end of one long bull run and the figurative start of a new historical generation, as a base date for determining how pricey or cheap equities have become. Some twenty and a half years later on August 12, 1982, the DJIA stood at 777, a tiny net gain of 0.3% per annum from December 1961. No fewer than six distinct bear markets constituting a peak-to-trough drop of at least 20% occurred during this interval. The largest of these, a 45.1% drop between January 11, 1973 and December 6, 1974, also was the biggest postwar bear market in magnitude.
Like 1947-61, the 1980’s and 1990’s were mostly a period of equity market strength. At 2,722 on August 25, 1987, the peak before that year’s crash, the DOW had soared 28.3% per annum in just five years, raising the annualized climb from December 1961 to 5.0%. When the DJIA peaked January 14, 2000 at 11,723, the annualized advances amounted to 16.9% from August 12, 1982 and 7.5% from December 13, 1961.
Although the DJIA set a new record high last year, this whole decade has been a bust. At today’s low of 8,222, the index had fallen 28% since September 12th and 42% since the high of 14,165 on October 9, 2007. This bear market is close the postwar record in size, and today’s low represented an annualized advance of 5.3% from December 13, 1961 — just about where it stood in mid-summer 1987. Even from the May 1947 start of a 14-year bull run, the DOW had climbed at an annualized pace of 6.6%, which appears comparatively low and down from a pace of 8.5% per annum between the May 1947 low and the January 2000 high. Financial markets are full of over-leveraged niches. Stock prices do not appear one of those areas but are bearing much of the brunt of the shake-out.
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