A History of Severe Real S&P 500 Stock Bear Markets

Looking at the first chart which shows the real (inflation adjusted) S&P 500 (or its predecessor) stock market I have identified three historic severe stock bear markets. These I am defining as stock markets where from the stock market reaching a new high, they then proceeded to lose in excess of 60% of their real (inflation adjusted) value. These are best demonstrated by the second chart which shows each of these stock bear markets and the fall in percentage terms from the peak. So what were these bear markets.

The first severe stock bear (marked in purple on the chart) market started with a new real high being reached in September 1906. This period incorporated the 1907 Bankers Panic which was caused by banks retracting market liquidity and depositors losing confidence in the banks. This occurred during an economic recession and there were a number of runs on banks and trust companies. Additionally many state and local banks were bankrupted. All sounds a bit familiar doesn’t it? So from the high it took until January 1920 for the stock market to reach a real loss of 60.9% and then until December 1920 to reach its real low of -70.0%. That’s a period of 14 years and 3 months.

The second severe stock bear (marked in blue on the chart) market started with a new real high being reached in September 1929. This is obviously the well known period of the Great Depression. I won’t go into the history here as I’m sure it’s well known by all readers. What is interesting however is that the markets passed through -60% on a number of occasions. So from the high it took until January 1931 for the stock market to reach a real loss of 62.0% and then until June 1932 to reach its real low of -80.6%. That’s only a relatively short period of time however it really wasn’t over then as the market never really recovered and kept dipping back below -60% in real terms. This occurred in January 1933, July 1934, April 1938, June 1940, February 1941 and was back at -73.1% in May 1942. That’s a period of 12 years and 8 months. Even 20 years later the market was still below the real -60% mark.

The third severe stock bear (marked in olive on the chart) market started with a new real high being reached in December 1968. This period incorporated the stock market crash of 1973 to 1974 which came after the collapse of the Bretton Woods system and also incorporated the 1973 Oil Crisis. So from the high it took until March 1982 for the stock market to reach a real loss of -60.9% and then until July 1982 to reach its real low of -62.6%. That’s a period of 13 years and 7 months.

So that brings me to the last line on the chart marked in red which shows the real bear market that we are currently in. This period began in August 2000 with the Dot Com Crash however we were unable to reach a new real high before the Global Financial Crisis took hold. In this real bear stock market we were unable to break through -60% ‘only’ reaching -58.6% in March 2009. That is a period of only 8 years and 7 months. Even today we are still -38.1% which is a period of 9 years and 5 months which is a relatively short period of time compared with the bears shown above.

My question is once the governments of the world are forced to stop stimulating the economies through borrowing (for example a bond market strike) or quantitative easing (for example excessive inflation) could we yet see that real -60% bear? History suggests there is still plenty of time for it to occur.

Assumptions include:
- Inflation data from the Bureau of Labor Statistics. December ‘09 & January ‘10 inflation is extrapolated.
- Prices are month averages except January ‘10 which is the 11 January ’10 S&P 500 stock market close.
- Historic data provided from Professor Shiller website.