Bear markets are typical of any market. The most recent in global equities was the result of the health crisis caused by the Covid-19 pandemic that, economically, led to forced closures for companies and, in the financial framework, volatility was unleashed in the markets.
But What are bear markets like? Has the latter strayed far from the historical average? Because US equities represent 60% of global equities and are highly correlated with other trading environments, we will focus on this primarily.
What are bear markets like?
First of all, we must define what a bear market is. This is a long market period in which an investment has falling prices. Typically characterized by a stock market that has fallen at least 20% from its previous high.
Historically, bear markets have been repeating themselves over the years, as investors’ expectations are discounted through prices. We look at its structure and its main characteristics.
Taking as a reference the US equities represented by the S & P500, losses from a bear market are 35.62% -the bull markets add an average revaluation of 114% -. Comparatively, the last bear market experienced by the S & P500, the index fell 33.92% so we were very close to the historical average
They are more frequent than many may believe, the result of the mirage of recent years. We have witnessed 26 bear markets since 1928.
It is also necessary to clarify that the bear market does not always go hand in hand with an economic recession. The clearest proof is that I have those 26 bear markets since 1929, but only 15 recessions during that time. Bear markets tend to go hand in hand with a slowing economy, but a declining market doesn’t necessarily mean a recession is on the way.
It is said that when the market goes up it goes up the stairs and when it goes down it goes up the elevator, and the statistics back it up. Bear markets tend to be short lived. The average duration of a bear market is 289 days, or about 9.6 months. That is significantly shorter than the average duration of a bull market, which is 991 days or 2.7 years.
The last bear market was exceptionally short, 33 days to sign the lows, the shortest in the last century.
On average ** every 3.6 years we would see a bear market *. For its part, although the bull market that ended in 2020 is considered by many to be the longest on record, the longest was the one that lasted from December 1987 until the dot-com crash in March 2000 is technically the longest – a 19.9% drop in 1990 almost made it jump.
Despite multiple bear markets, they have been less frequent since WWII. Between 1928 and 1945 there were 12 bear markets, that is, one every 1.4 years or so. Since 1945, there have been 14, one every 5.4 years or so.
The four worst bear markets
Bear markets can be very intense, the following four bear markets have been the worst in the last century:
- The 1929 crash that opened the doors to the Great
- The 1973 oil crisis, which was followed by a period of stagflation.
- After the biggest bull market in history, the dot.com crisis.
- The subprime mortgage crisis that has marked the era of low interest rates.
From them, the bear market from September 1929 to June 1932 resulted in an 86.2% loss for the S&P. The others are not even close, with losses of 56.8% in 2007-09, 49.1% in 2000-02, and 48.2% in 1973-74. After the 1929-32 crash, stocks didn’t regain their previous high until 1954.
Interestingly, three of the four worst bear markets were preceded by a high valuation. Among the four worst bear markets with more than 40% losses, started with a somewhat extreme market valuation. The only exception is the 1973 bear market caused by the Arab oil embargo and subsequent recession, but it also had an above-average PER at first.
Source: El Blog Salmón by www.elblogsalmon.com.
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