COMMENT
The Biggest Bear Markets

By David Kuo (TMFDragon)
August 11, 2005

Bears and bear markets are much maligned. But without bears we wouldn't have bulls, and an occasional grizzly is just the tonic for a healthy stock market.

Over the last 50 years, the stock market has experienced no less than eight bear markets - that is eight occasions when there has been a long-term slide in share prices. Just how long is long-term, is open to debate though, but most pundits reckon a year is quite long enough, and I tend to agree!

I took a look at some of the more notable bear markets of the last fifty years in the hope of learning a few things from them. Here's what I found:

1956-1958

The first bear market in the last half century occurred between 1956 and 1957. Over the two years, shares fell by more than 10%. Up until then, the market had risen steadily since 1949, and the two-year long decline was said to be triggered by US President Eisenhower's heart attack in September 1955.

1964

The next bear market occurred six year later when the shares fell 5% over twelve months. Prior to this, shares had risen almost threefold since the end of the previous bear market. Again the cause of the fall can be traced in part to events across the Atlantic. This time, Anthony DeAngelis, who is also known as the "Great Salad Oil Swindler", undermined the confidence of investors when he duped financial institutions out of $150m. He did this by filling tanks predominantly with water and putting a little salad oil on the top!

1969-1970

After a period of strong gains, shares went into reverse again towards the end of the sixties, when the stock market declined during a period of mild inflation. Global economies slowed down, though some have described it more as a hiatus rather than a recession.

1973-1974

The decline in shares between 1973 and 1974, after the excitement of the 'Nifty Fifty', is one that many stock market investors today may still remember - I certainly can. The bear market lasted almost 700 days before it eventually bottomed out. The fall was brought about by the Oil Crisis of 1973, when energy prices more than doubled.

1990

It was sixteen years before the stock market was smothered by another bear hug. In 1990, Iraq invaded Kuwait, and that helped spark a 10% fall in equities. Consequently, this bear market has been dubbed by some as the 'Saddam Hussein Bear'.

2000-2002

Following the end of the first war in Iraq, shares rose every year for the next nine year bar one. But between the start of the Millennium and 2002, UK shares lost 37%. A number of factors have been blamed for this bear market. These include the Enron scandal and the bursting of the tech and telecom bubble.

In terms of bear markets, the decline in shares from 2000 to 2002 is one of the longest in stock market history. The other was the Great Depression which lasted from 1929 to 1931. Interestingly, bear markets are not that unusual. Since 1917, there have been 15 bear markets, though the severity of each has varied. On average, though, bear markets can cause share prices to fall around 25%.

Opinions differ as to why bear markets happen. But on the whole many economists accept that in a capitalist system, there will inevitably be boom and bust cycles (some modern day chancellors may disagree though!) That's because economies tend to grow for long period then contract before they grow again. Stock markets tend to move in tandem with this growth because shares typically follow the earnings growth of businesses. So its not surprising that stock markets can fall as well as rise.

Despite eight bear markets in the last fifty years, shares have still managed to increase in value 300 times. This equates to a rise of around 12% per year. As such, I never look upon bear markets as something that damages my wealth, but instead as a long-term buying opportunity. And just in case the thought of bear markets still give you the willies, they tend to occur once every six years - meaning the next one is due around 2008!