James Stack of InvesTech Research looks at past bear markets and recessions going back more than 82 years. The details of his findings?

• Generational bear markets, with losses exceeding 40% are the exception, not the norm. Since 1940, only one in four bear markets reached such a loss.

• The 2000-02 bear market was so severe because of record overvaluation extremes at the start, and the washout of the high-tech bubble with a -78% loss in the Nasdaq (of which many of the largest stocks were also components of the S&P 500).

• Unweighted indexes declined only ~25% in the 2000-02 bear market;

• The 2007-09 bear market was extreme because the collapse suddenly exposed all of the mortgage derivatives on the balance sheets of major banks. The extent of this exposure was not well known — even to CEOs of the banks.

• Bear markets without recessions are more of a rarity. Since 1940, when they have occurred, the declines are usually milder. The 1987 Crash, with a loss of -34% was the exception; but ’87 was triggered in a monetary climate where interest rates were soaring and the U.S. dollar was tumbling.

• Average valuation, as measured by the P/E ratio of the S&P 500 Index, at the start of all the bear markets exceeding 30% was 21.8. Today, the P/E ratio of the S&P equals 14.7.

One thought on this: The fear of another giant bear market — of another 50% loss — is likely due to the recency effect and the aftermath of 2007-09 as much anything else.

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Click to enlarge:

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Source:
InvesTech Research
Technical and Monetary Investment Analysis, Vol11 Iss11
October 21, 2011

Category: Investing, Markets, Psychology, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “A Historical Perspective of Recessions and Bear Markets”

  1. MayorQuimby says:

    The frame of another be market comes from the fact that an overleverged economy has not been allowed to delever so we essentially have solved nothing and have only delayed the inevitable.

    Total credit vs. GDP. Look it up. No deleveraging to be found.

  2. machinehead says:

    ‘Today, the P/E ratio of the S&P equals 14.7.’

    That’s as a multiple of record earnings … and with interest rates at generational lows (thus with nowhere to go but up). With suitable adjustments for these factors, this seemingly ‘average’ P/E ratio is actually a bit on the high side. The Q ratio, and market cap as a percentage of GDP, also remain above average.

    I much prefer Robert Shiller’s 10-year P/E ratio as a reliable guide to valuation. From time to time, the current year trailing P/E ratio has cracked up completely … for instance, when consolidated earnings on the DJIA went negative. Such malfunctions have never happened to Shiller’s 10-year P/E ratio.

  3. machinehead says:

    ‘Today, the P/E ratio of the S&P equals 14.7.’

    That’s as a multiple of record earnings … and with interest rates at generational lows (thus with nowhere to go but up). With suitable adjustments for these factors, this seemingly ‘average’ P/E ratio is actually a bit on the high side. The Q ratio, and market cap as a percentage of GDP, also remain above average.

    I much prefer Robert Shiller’s 10-year P/E ratio as a reliable guide to valuation. From time to time, the current year trailing P/E ratio has cracked up completely … for instance, when consolidated earnings on the DJIA went negative. Such malfunctions have never happened to Shiller’s 10-year P/E ratio.

  4. mark says:

    Two comments:

    1. Comparisons to post-1940 recessions aren’t very useful. None of the critical factors present today were in effect in any of those recessions. Our current economic circumstances are very different – interest rates at the zero bound, the lack of traction of enormous increases in the Fed balance sheet (plus the balance sheets of other central banks around the world), a major loss in real estate value nationwide (and again this is a worldwide phenomenon), wages either stagnating or even falling (a very rare event), a significant probability of deflation (see comment on wages), the fact that the slowdown is worldwide (the only important exception being China which has a property bubble with major risks associated with it) etc.

    2. I continue to believe that Japan post-1990 and the so-called “Long Depression” of the 1870s – 1890s provide the best analogies to today. This would imply a decades long series of recessions, recoveries, recessions, recoveries, rinse and repeat. Japan suggests eventual loss of 80% nominal in the stock marktet and 90% in real estate. A focus on the ’30s may very well be misleading, leading one to think that we had our 1929 event and now it’s up the slope of hope for the foreseeable future.

  5. klbjcb says:

    I would be interested to see this data if the beginning was from 1900, since this is the worst market since the 1930′s. Why pick 1940? (Also, the DJIA dropped 50% in the following 2 years – great time to get in then)

  6. zell says:

    Boring. Recency is at work but that misses the 18 wheeler ready to roll over James Stack’s P/E’s. No peripheral vision.
    Mayor Quimby on point. Add to that global social centrifugal forces at work and it’s a fine mess we’ve gotten ourselves into.

  7. seana0325 says:

    Hey Barry,
    Any chance you could do a post about inflation. You know, something for us laymen folk, that would have to happen for us see equities and such move up b/c of too many $ dollars chasing too few things.

    It just seems that everything of late that is happening is the unthinkable, and in my mind equities moving above their all time highs are the unthinkable at the moment. Is it possible, and if it is could it happen relatively soon?

  8. Petey Wheatstraw says:

    “The fear of another giant bear market — of another 50% loss — is likely due to the recency effect and the aftermath of 2007-09 as much anything else.”
    ____________

    Nothing got fixed, nothing got settled, and nothing changed — except for sweeping bad debt off of balance sheets (with a fiat currency broom wielded by the Fed clean-up crony), and hiding it under the rug to emerge, further putrified and much more toxic, on another day.

    The fear of another bear market is because the lump in the carpet is too big to ignore.

    What we have witnessed is nothing like the RTC and its RESOLUTION of the S&L “crisis.”

  9. Sunny129 says:

    Which one of these past, post recession-recovery rally, the ACCOUNTING standard changed from t M to M into M to model/maturity/fantasy standard?

    My best guess is NONE!

    Then we are in Alice’s Wonderland!

  10. nofoulsontheplayground says:

    I see 6 drops averaging 45% loss on that chart during the 17-year cycle from 1929-1946. The current cycle starting in 2000 still has another 6-years to go.

  11. philipat says:

    I prefer to look at the macro cycles. Seculat bear markets tend to last 18-20 years. This one began in 2000.

  12. Futuredome says:

    “Nothing got fixed, nothing got settled, and nothing changed”

    Wrong on all accounts. What did happen was everyone figured out that the US is in the grips of a severe deflation that has been covered up with credit……….since 1980. Interest rates don’t lie.

    The actual size and credit driven size of economy are the real factors people miss. We only saw a small crumb of credit deflation in 2008. Just think if we saw the full monty?

    The truth is, capital owners can no longer grow the global economy. Chindia will eventually meet the same fate as the west. Only then will capital owners slash their necks and destroy the world economy, afterall profit taking can be had. Billions will starve, nations will be trashed and capital owners will make sure their rule is not ended as they set a vastly smaller economy for the world.

  13. crutcher says:

    Bear market history seems to suggest that they end when P/E’s are in the range of 6-7 – an expectation of that sort of reversion (assuming constant earnings, which is IMO optimistic) would also predict a 50% drop from here. The recency effect, while real, is fading and being supplanted by other positive biases… hope springs eternal.

  14. ToNYC says:

    If you think of ZIRP as a tank trap like the one just up from 20 Broad, you get the picture of the Bernank-Geithner process of fundamental disconnection. Send in a 1,000 FBI agents to end this FED-Treasury travesty
    of a HFT- whipped and gamed buzz market.

  15. ToNYC,

    toward your point..

    yon’ QOTD:

    “The truth that makes men free is for the most part the truth which men prefer not to hear.”

    -Herbert Agar

  16. sailorman says:

    Since there is general agreement that this recession is different (there has been no credit collapse since the depression), what does it mean to try and extrapolate the behavior of past recessions (other than the great depression) and apply that information to the current market?

  17. [...] A historical look at recessions and bear markets.  (Big Picture) [...]

  18. Petey Wheatstraw says:

    Futuredome Says:
    October 29th, 2011 at 10:16 pm

    “Wrong on all accounts.”

    Really? Your comment doesn’t seem to support that my statement was wrong. In fact, it seems to support it. You say:

    “We only saw a small crumb of credit deflation in 2008. Just think if we saw the full monty?”

    Exactly. Nothing has changed, and it’s more of the same — a doubling-down on the loose money policies that got us here in the first place.

    Show me an unwinding of bad debt. Show me prosecutions. Show me mark to market assets held on their balance sheets being liquidated and sold at prices the market would bear (the reason they expedited securitization of bad loans, in the first place, was because the “assets” they securitized weren’t worth squat).

    Show me how Fed policy hasn’t continued to enrich the banks so that they can lend even more “money” to a populace that is obviously unable to service — yet alone settle — either existing or new debt.

    If you remove your quote of my comment and the first sentence of yours, we’re in agreement.

    What is up wit dat?

  19. rd says:

    Another “post-1940″ analysis using a “recent” data set. My fear of another 50%+ drop is based on the following:

    1. Shillers CAPE and Tobin’s Q are still at the top quintile level (now biased because of the extremely high valuation of the past 12 years). Secular bear markets have not bottomed until these valuations are in the bottom quintile.

    2. Developed world debt (public and private) is still at very high levels with little net deleveraging. The solution to econmic problems is still viewed as creating more public debt which usually does not end well.

    3. Corporate profits are now much less connected to their home countries economices. Recent investment articles have suggested buying major S&P 500 companies because 50% of their profits and projected growth of profits comes from their emerging economy divisions. Weak home economies will likely come home to roost in their growth. Home country profit margins have increased largely due to cost-cutting – not much more growth in that.

    4. Massive intervention by central banks is not increasing developed country private demand and employment.

    5. Developed world governments are becomingly increasingly fractured simulataneous with a growing movement towards austerity. There is a growing disconnect between the population and their politicians.

    This is a very fragile system that could quickly collapse like a house of cards. I don’t know if the market will go down a lot in the next year or the next 10 years. These big down cycles tend to take 15 years plus to resolve, so we are still in the middle game. The end-game is yet to come and it will probably not be fun.

  20. techy says:

    I wonder if anybody who comments here makes money in a bull market.

    So you guys think that all those people who kept buying iPhone and paid $30 in data plan, during the recession of past 2-3 years are going to lose their income??

    I know tens of people whose economic situation did not change much, yes it did not get better, but they still have money to buy a kindle fire and iPhone-5.

    I still repeat the things I have been saying since 2008-2009. You cannot fight reflation, all debt driven deflation will be cured using the printing press. Its not being done in USA in bigger magnitudes thanks to the republicans agenda of winning elections at any cost, but mark my word, in 2013 once the republicans win the elections, the spigots will open like there is no tomorrow.

    Student loans, mortgage loans will be subsidized…so on and so forth. debt is no match to the printing press.

  21. Sockmonkey23 says:

    re: Schiller’s CAPE, there’s nothing magical about a ten year window. The past ten years happens to include two severe earnings recessions. In 2007, it only included one.

  22. victor says:

    I could not find ONE optimistic comment here. Granted, very imperfect sample, but: bullish sign for the market ahead?

    @Mark: well put. Unfortunately we didn’t have a Bill Seidman (or for that matter BR) in 2008. In the last year of his life, Seidman was critical of rescuing the banks’ managements and their shareholders during the Troubled Asset Relief Program, comparing the bailout with action he and his team at the Resolution Trust Corporation took during the S&L crisis of the 1980s (quote from Wiki):

    “What we did, we took over the bank, nationalized it, fired the management, took out the bad assets and put a good bank back in the system”. See also BR’s recent WSJ op-ed along the same theme.

  23. Sunny129 says:

    Which one of these past, Bear followed by BULL market rally, the ACCOUNTING standard changed from Market to Market before the trough of BEAR phase into M to model/maturity/fantasy standard, firing up
    the start BULL phase, done since March 2009?

    The on going fraudulent, funny accounting is very unique and grotesque but accepted with no questions/accountability in the current bull market, rigged since March of 2009! Banks declared ‘profits’ by reducing the reserve against ‘loss reserve’ and also declared profitable when the value of their ‘debt on their balance sheet’ went down! Wow!

    The charade continues!

  24. victor says:

    My secret hope for after Nov-2012 is that the new brave POTUS (that includes Obama but please sans Uncle Ben and Geithner-ites) finally gets it and does “the right thing” reg. the banking/financial sector per my above comment. Alternative? OWS anyone?

  25. crunched says:

    I’ll take shillers PE over this one.

    Just read tonight in ‘Confidence Men’ how Shiller tried to warn Geitner about the housing bubble duringt an advisory board meeting in 2004. Geitner didn’t want to hear it and kicked him off the board.

  26. [...] morning reads start your week : • A Historical Perspective of Recessions and Bear Markets (TBP) see also Stocks Going By the Book (WSJ) • Dear Ben: It’s Time for Your Volcker Moment (NYT) [...]

  27. [...] A historical look at recessions and bear markets.  (Big Picture) [...]

  28. machinehead says:

    This chart is missing two recessions, in 1945 and 1948-49.

    http://www.nber.org/cycles.html