Lesson from Bull and Bear Markets
We just witnessed major stock indexes reach their record-high closes in October 2007. On October 9, 2007 Dow Jones Industrial Average reached its high at 14,164.53 and S&P 500 topped at $1,565.15. NASDAQ followed suit with closing high of $2,859 set on October 31, 2007.
Since the peak in October 2007 the stock market has declined and had skirted the bear market territory. Investors worry that the bear is threatening and they retread from stock market. The current uncertainty was originated by sub-prime mess and housing slump in 2007 that were further fueled by high oil price. The economy is felt like in recession; profits are squeezed; layoffs are back in the news.
Looking back, we can learn invaluable lesson from market dynamic in the past. Market corrections are good for overall economic health, while bear market provide opportunity to invest at bargain of beaten down securities. Great investors have been known for their habit of rushing in where others fear to tread. When chaos creates overwhelming volatility, the markets are creating exceptional bargain opportunity for cool-headed investors who have a long horizon. Smart investors with strong stomachs are looking for real market failures.
Bear Market
Bear market is defined as major stock index declines of 20% or more from its previous closing peak during a one-year period.
There have been 33 bear markets since the Dow Jones Industrial Average was created in 1896.
Since its establishment up to 2007 the Dow was down on average 34.63% during the bear markets. The declines ranged from 53.57% on the deep side (1932) to the shallowest drop of 21.16% (1990).
They lasted, on average, nearly 11.5 months, ranging from 36.55 months (1946-49) to 1.81 months (1987).
In a shorter period, since World War II, Bears appear less often, are smaller, but last a bit longer. In those 63 years there have been 11 bear markets, 10 fewer than in the preceding 49 years. Bears suffered 29.71% on average, ranging from 45.08% (1973-74) to 21.16% (1990). Their average length was 14.17 months, with a high of 36.55 months (1946-49) and a low of 1.81 months (in 1987).
Bull Market
More often than not, when a bear market ends and a bull market begins. The Dow’s history indicates that the average bull market in the post-World War II era has gained nearly 136% and lasted four years and four months. The bull has delivered three giant bull markets; a 354.8% gain for the period of 1949 to 1961, a 250.4% increase from 1982 to 1987, and a 395.7% advance during the years of 1990 to 2000. This phenomenon provides great opportunity to smart investors to accumulate stocks at bargain.
The recent bull market can be an indication of the rare opportunity. The bull that sent the Dow to its peak on Oct. 9, 2007 lasted five years and gained 94.4%. The bull market run eight months longer than the post-war average although appears to be below the post-war average gain.
Corrections
In many cases, market drops are merely corrections, which mean declines of at least 10% but less than 20%. Over the Dow's history there have been 74 of them, 32 of which occurred after World War II, and the average drop was almost 14%.
Many bull markets are interrupted by one or more corrections. The longest bull run without a correction was a 249.2% climb from 1990 to 1997.
Bear markets sometimes don’t drop in a straight-line. Bear markets have “upward” corrections, though seven out of 11 didn't have any correction since World War II. These upward-correction rallies raised the Dow by an average 15% and lasted around three months.