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BEING STREET SMART
by Sy Harding
Why The Bear Market Is Not Over! (May 6, 2002).
There have been 29 bear markets over the last 100 years. They averaged a decline of 31.6% in the blue-chip stocks of the Dow, (much worse in the broad market, particularly in the smaller more speculative NASDAQ type stocks). The ten worst bear markets of the last 100 years averaged declines of 49.4% in the Dow.
Historically, the worst bear markets tended to follow the best bull markets. That makes sense since obviously the best bull markets lasted long enough to create excesses that required the largest declines to get the market back to normal conditions.
In the current bear market, at its low last September (2001), prior to its current big favorable season rally, the Dow was down 'only' 29.7% from its bull market peak, not even as much as its 31.6% decline in the average bear market. At its low last September, the S&P 500 was down 36% from its bull market peak, exceeding the average bear-market decline of 31.6%, but not near the market's average 49.4% decline in the ten worst bear markets. And in 2000 I did forecast we would see the worst bear market since 1929. To meet the average decline of the 10 worst bear markets from their bull market peaks, the S&P 500 would have to decline to around 765.
A 49.4% decline sounds impossible? A decline of 72% in the Nasdaq also seemed impossible before it happened. But at its low of 1,425 last September the Nasdaq was down just that, 72% from its bull market peak of 5,048. It has already been the worst bear market for the Nasdaq ever. So just an average serious bear market decline for the S&P 500 is impossible? Don't you believe it.
That the S&P probably needs to decline at least close to that much before this bear market ends can also be seen in the current valuation levels. The S&P 500 is selling at either 45 times earnings or 30 times earnings, depending on whose version of earnings you accept. Either way it's a long ways down to the S&P 500's long-term average of 14 times earnings.
Duration of Bear Markets.
The bear markets of the last 100 years lasted an average of 14 months. The longest (also the deepest), that of 1929-32, lasted 34 months. The current bear market has now been underway since March 24, 2000, or 25 months. That's almost twice as long as the 14-month duration of the average bear market. But it's still 9 months short of the duration of the 1929-32 monster. And guess what? The bull market of the 1990s very closely resembled the bull market of the 1920s in ways too numerous to go into here. That is one of the reasons we predicted that the subsequent bear market would be similar to that which followed the 1920s bull market, at least in duration?
We are convinced the bear market is not over, and we will see even lower lows this year.
The evidence says the bear market has not completed its work. The S&P 500 has not reached the percentage declines it suffered in previous serious bear markets. It also remains at high valuation levels like P/E ratios. Miscellaneous items like consumer confidence, unemployment rate, etc., remain at levels more often associated with market tops than bottoms. Investors have still not lost their hope and expectations for a quick return to the conditions and easy money of 1999.
The market is now in its unfavorable seasonal period until next fall. The majority of previous bear markets ended in the second half of the year, not the first half. Most notable or recent: The 1973-74 bear market ended in early December. The 1981-82 bear market ended in August. The 1987 crash, 1990 bear market, 1998 mini-bear market, all ended in October. Even last year's late year bear-market rally began at the September low.
Putting it all together a good case can be made for a new bear market low by next fall, providing opportunity for substantial gains from the downside from here, but with that low probably being the end of the bear market, if the market is down sufficiently, and the pessimism is great enough by then.
However, the downside will not to be in a straight line down. With economic numbers, earnings reports, and turmoil in international situations and currencies (including the U.S. dollar) likely to continue to alternate between good news and bad, the market is likely to stage one or more rally attempts, most likely with timing that will fit in with the tradition of a summer rally.
We expect that market-timing of intermediate-term moves will continue to be the way to handle this market. Remember that even while the bear market continued, the Nasdaq had two bear-market rallies last year in each of which it gained more than 40%, even though it ended down 21% for the year.
Stay tuned!
UPDATE: The bear market did indeed continue, with another leg down in the market's unfavorable season in 2002 to a new low in October. As expected that year there was a brief summer rally. But the end of the bear market did not arrive until October 9, with the S&P 500 at 776.
That had it down 49.2% from its 2000 peak, within 0.2% of the probable decline mentioned in paragraph 3 if the bear market was to equal the average of the ten worst previous bear markets, as we forecast in 1999.
The chart shows what happened. The bear market was not over. It did end in October, at the end of the market's 2002 unfavorable season, and after an intervening brief summer rally.
