Some Bear-Market Insight in One Chart
Each quarter, I eagerly look forward to the arrival of JPMorgan’s interactive Guide to the Markets -- 70-plus pages of charting pleasure. It's packed with sexy graphics, loads of data and slick stock, bond, commodity and economic charts.
One of my favorites chart is below. It shows the total declines in the Standard & Poor's 500 Index from highs, as well as the ranking and duration of each bear market. The table offers four possible causes for each episode: recession, commodity spike, tightening by the Federal Reserve and extreme valuations. The table also shows the start date of the subsequent bull market, with its returns (excluding dividends) and duration.
JPMorgan defines a bear market as “a 20% or more decline from the previous market high. The bear return is the peak to trough return over the cycle.”
This definition captures 10 major bear markets since 1929. On average they have a decline of 45 percent and last 25 months.
JPMorgan's definition differs somewhat from the metrics used by Merrill Lynch’s analytical team, which also defines a bear market as a 20 percent decline, but without an intervening 20 percent rally (on a closing-price basis). Merrill Lynch's broader definition generates a list of 25 bear markets, also beginning in 1929, with average declines and duration of 35 percent and 10 months, respectively. By way of comparison, the Merrill Lynch methodology generates 11 bear markets between the 1929 stock-market peak and 1940, while JPMorgan’s methodology yields two bear markets (1929 and 1937).
A few thoughts on the chart itself:
• It makes me reconsider all of those times I mocked buy-and-hold investors while markets cratered. Markets come back eventually, making investors whole -- provided you can wait it out.
• It makes me appreciate my long-standing interest in behavioral finance, for the reality is many (if not most) people panic and sell when markets decline.
• Someone who bought shares in 1929 had to wait, on average, until 1954 to get back to breakeven on a price-only basis. Whenever anyone says that the U.S. can't become Japan, the proper answer is that it's actually the other way around -- Japan became the U.S., just more so. The Nikkei-225 Stock Average index, which peaked in late 1989, is still down about 50 percent -- a much worse performance than U.S. markets from 1929 to 1954.
• No event has matched the 1929 stock market crash in terms of depth (an 86 percent nosedive!), breadth and duration. The 79 percent plunge in the Nasdaq Composite Index after March 2000 was huge, but it was limited to dot coms, technology and telecom. The rest of the market endured much less damaged. Similarly, the devastation among shares of homebuilders, banks and securities brokers from 2007 to 2009 was in the 80-percent range, but the broader market's 57 percent tumble was far from the worst.
• Don’t assume that when shares of one industry group falls a lot that it represents a buying opportunity -- please see leather-belt and steam-engine makers in the past, PC makers more recently.
• Broad markets that are down 50 percent usually do look pretty attractive.
I will revisit the Guide to the Markets at a later date, once I've mined it for more insights.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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