Oh seven, eight, and nine: Remembering the Last Bear Market

I’ve been working on a report for our clients about the current conditions of global markets and how we’ll know when it changes from positive to negative. I’m calling it something like “What a Market Top Looks Like”. It’s actually a working document; something I’ve added to since 2001. I haven’t sent a piece like this to our clients since late summer of 2007 when I believed global markets were getting closer to a significant peak.

The current bull market in U.S. stocks is now about 58 months old. As I explained in The REAL Length of the Average Bull Market, bull markets have averaged about 39 months and bear markets about 17 months. A full market cycle (average bull + bear) is 56 months. The current bull market, then, is longer than the historical average full market cycle. Probably driven by the Fed’s QE experiment, the advancing part of this cycle is 20 months longer than average. So, it seems to make sense to start watching for signs the topping process has started and remind our investors what that looks like and how we deal with it. Most people will become more and more complacent the higher and longer it goes – I’ll do just the opposite.

As I’ve been thinking about this lately, it occurred to me that, if anything, most thoughts seem more focused on the “bear market” period than they are what a market topping process looks like. Clearly, what is today known as the “Global Financial Crisis” or “Great Recession” will be forever imprinted in people’s memory – especially those who held on to losing stocks and bonds to large losses.

Someone was recently telling me of a strategy that “made money in 08”, but when I looked at it, they left out that it had declined -20% just before 2008. For many investors, that -20% may be just enough to cause them to exit the strategy, so it wouldn’t have mattered what it “did” the next year. Losses as large as -20% turn $1,000,000 into $800,000 or $10 million into $8 million. Whether it’s rational or not, investors start to perceive such losses as permanent. The more they think about it the more they may start to experience disappointment from the dreams of what they could have done with all that money they once had – but is lost. But, while our money is invested in a market and exposed the possibility of a loss – a gain is the markets money until we take it.

When people talk about the last bear market, they call it “2008”. They remember “2008” or “08” pronounced “oh – eight”. When we talk to investors about our investment programs they say “How did it do in 08?”. But, the trend wasn’t just 2008.

Below is a total return price chart of the S&P 500 stock index during the calendar year 2008. It declined -38.49% during the calendar year 2008. However, at one point it was down -48%.

S&P 500 stock index 2008 return

That was just the calendar year 2008. The stock market decline actually started October 10, 2007. Below is a chart of that date through year-end 2007. The S&P 500 stock index had already declined -10% at one point and the -6.18% adds to the total decline.

S&P 500 2007 beginning of bear market

You may start to notice how different the result can seem depending on when you look at it. As it turned out, 2008 was just the middle of the bear market. As we saw in the first chart, October 2008 was the first low. It seems people may call the bear market “Oh eight” because 2009 ended “up”, but the bear market actually continued into 2009. In fact, 2009 was some of the steepest part of the waterfall. Below is the bear market continuation into 2009, an additional  -25% decline.

Bear market continuation 2009

The full bear market was 2007, 2008, and 2009. It was a -56% decline in total.

Full bear market from 2007 to 2009

You can probably see how studying trends closely, we begin to realize that arbitrary time frames, like a calendar year, can be misleading about the bigger picture.

But, what may be more useful today is a strong understanding of the price trends leading up to all the historical bear markets.

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