A Brief History of Bear Markets

Well, it's finally here, and we've had plenty of warning. The S&P 500 (INDEX: ^GSPC) officially slipped under the limbo stick that marks an "official" bear market on October 4th, shedding 21.6% of its value since its May 2 peak. The Dow Jones Industrial Average (INDEX: ^DJI) isn't far behind, down 19.5% from that same day. We've had plenty of bear markets to compare with, so is this time really different, or are clues to our financial future hiding in the wreckage of the past?

Bear necessities
Broadly speaking, a bear market is any decline of 20% or more in a broad market index. This isn't a hard and fast rule -- there were three major drops from 1937 to 1942, yet they get bundled into one longer bear market on occasion. For investors who lived through it, it didn't matter how many there were; none of those bears were just right.

Bear Market Dates

Length

Market Loss

Recessions

What Happened?

9/3/29 - 7/8/32

34 months

89.2%

8/29 - 3/33

The Great Depression (no surprise here).

3/10/37 - 3/31/38

12 months

49.1%

5/37 - 6/38

Government austerity and tax increases caused a jump in unemployment, or the monetary supply expanded too rapidly. Economists disagree on the causes. I'm as shocked as you!

11/9/38 - 4/11/39

5 months

21.7%

None

The herd was skittish.

9/12/39 - 4/28/42

31 months

40.4%

None

World War II.

3/10/37 - 4/28/42*

61 months

52.2%

5/37 - 6/38

See above.

4/6/56 - 10/22/57

18 months

19.4%

8/57 - 4/58

Tight monetary flows, global political uncertainty, Sputnik.

11/15/61 - 6/26/62

7 months

27%

4/60 - 2/61

The first tech bubble burst (IBM (NYS: IBM) had a P/E above 80 before this bear started, but its P/E is just over 14 today), Bay of Pigs fiasco, rising interest rates.

2/9/66 - 10/7/66

8 months

25.2%

None

Vietnam, tight investment capital, flight to high bond yields.

11/29/68 - 5/26/70

13 months

35.9%

12/69 - 11/70

Vietnam again, Nixon elected, rising interest rates, angry hippies, fiscal and monetary tightening.

1/8/73 - 12/6/74

23 months

44.9%

11/73 - 3/75

Stock price corrections, oil price shocks and stagflation, rising unemployment, no Nixon to kick around anymore.

9/21/76 - 2/28/78

16 months

26.9%

None

High inflation and rising oil prices.

4/27/81 - 8/12/82

16 months

24.6%

6/81 - 11/82

Super Volcker battled the evil inflation monsters.

8/25/87 - 10/26/87

2 months

34.1%

None

Black Monday. Everybody panic!

7/16/90 - 10/11/90

3 months

21.1%

7/90 - 3/91

Weakened economy, oil price shocks, high debt, consumer pessimism. Sound familiar?

4/3/00 - 10/9/02

30 months

35.1%

3/01 - 11/01

Dot-com bubble exploded, 9/11.

10/9/07 - 3/9/09

17 months

53.8%

11/07 - 6/09

Subprime mortgage crisis, worldwide financial madness, credit crunches and layoffs and bailouts, oh my.

Avg. (3 in the 30s)

16 months

36.5%

10 out of 15

 

Avg. (1 in the 30s)

19 months

37.6%

10 out of 13

 

Avg. 5 worst**

23 months

55.5%

4 out of 5

 

Avg. 5 mildest**

10 months

22.3%

3 out of 5

 

Sources: Yahoo! Finance, author's calculations, and numerous history-laden websites.
*Assumes multiple bear rallies but no official recovery until post-1942.
**By percentage drop. Assumes three separate recessions in late 1930's.


Be smarter than the average bear
We're now in the fifth month of our current bear market, and there's no telling where it will go from here. With the European default crisis unresolved, a shaky American economy, and political gridlock at home and abroad, our current problems bear similarities to several different declines. History might not repeat itself, but it often rhymes, and our present "Ode to Bears" looks like a mishmash of 1938 (the short one), 1966, and 1990, with a few words clipped from 2007.

My colleague Morgan Housel looked at the cyclically adjusted P/E ratio in August and found it trending very close to its postwar average. Prices are more reasonable by this measure than they've been at any point in the last decade, except during the last downturn -- which should signal opportunity for savvy investors.

Swipe that pic-a-nic basket
You can find those opportunities even deep in a bear cave. I looked back at 2008 to find a handful of high-flyers that avoided the subprime freefall. You shouldn't be surprised by what made it:

  • Family Dollar (NYS: FDO) was up 23% in 2008. The discount retailer offers budget-conscious consumers a safe haven, and that's bound to be important if belt-tightening continues.
  • Amgen (NAS: AMGN) rode the 2008 bear to a healthy 25% gain. It's flat this year, but that beats a 20% loss, and the company's still very healthy, sporting a P/E of 11.3 and a recently instituted 2% dividend.
  • Walmart (NYS: WMT) joined its bargain brethren (that's Family Dollar) on the 2008 outperformance list with a 16% gain. Little has changed since then, and the company isn't going to roll back into unprofitability in the foreseeable future.
  • One of the best 2008 performances came from UST, which was acquired by Altria (NYS: MO) that year. UST's new parent may be 2011's top stock, as it's up 8% this year and has beaten the Dow by 57% over the last five years -- and that's before dividends!

They're more afraid of you than you are of them
So we're in a bear market. Take a deep breath and relax. There are still opportunities in the wreckage, and as always, every little bit of information helps. Adding these solid companies to your Watchlist would be a great first step toward figuring out how you plan to survive without getting mauled.

If you're still nervous about the coming storm, there's a video you really need to watch before the real crash comes. It's got the information you need to protect your investments, and it's absolutely free.

At the time this article was published Fool contributor Alex Planes holds no financial stake in any company mentioned here. Follow him on Google+ -- he promises not to link to any LOLcats. The Motley Fool owns shares of Wal-Mart Stores, International Business Machines, and Altria Group. Motley Fool newsletter services have recommended buying shares of and  creating a diagonal call position in Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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