Severe Real S&P500 Bear Markets – June 2012 Update

As I write this post the S&P 500 is trading at 1,322.  If I correct for the devaluation of the US Dollar over the years (ie correct for inflation) we were at this value back in July 1997.  So in 15 years the value of companies in the S&P 500 have gone precisely nowhere.  Sure, as a private investor you would have been paid dividends over this period, but they have only averaged around 1.8% annually, making it pretty difficult to try and save for retirement.

My first chart today shows 3 periods in the US stock market since 1881 when similar conditions have prevailed.  I call these the historic severe bear markets and they are periods in time where from the stock market reaching a new high it then proceeded to lose in excess of  60% of its real (inflation adjusted) value.  The percentage change in value from the peak for each of these periods in time are shown in my second chart.  So what were these bear markets?

The first severe stock bear market (marked in purple on the chart) started with a new real (inflation adjusted) high being reached in September 1906.  Following this high the market then began declining with the period incorporating the 1907 Bankers Panic which was caused by banks retracting market liquidity and depositors losing confidence in the banks.  This occurred during a recession and there were a number of runs on banks and trust companies.  Additionally, many state and local banks went bankrupt.  From the high it took until January 1920 for the stock market to break through the 60% real loss barrier (a real loss of 60.9%) and then until December 1920 to reach its real low of -70.0%.  That’s 171 months a period of 14 years and 3 months.  The market then didn’t reach a new real high until September 1928, which is exactly 22 years, at which point it was rising at a rate of 25% year on year.  Unfortunately though, the market had less than 2 more years of positive real returns in it before hitting the next severe stock market.

This second severe stock bear (marked in blue on the chart) market started with a new real high being reached in September 1929.  This is the beginnings of 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 US stock market passed through the -60% mark on a number of occasions.   From the high it took until January 1931 for the stock market to reach a real loss below the magic 60% mark at -62.0% and then until June 1932 to reach its real low of -80.6%.  The rate of decline was much faster than severe stock bear market one at 33 months.  However at this point the market never really recovered and dipped back below the real -60% mark 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 152 months or  12 years and 8 months.  Even 20 years later the market was still below the real -60% mark.  This bear market didn’t actually reach a new high until November 1958 which is a period of more than 29 years.  Again at this point the market was on a steep ascent rising at a rate of 27% year on year.

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.  A new high wasn’t reached until December 1992 which is a period of 24 years.

So that brings me to today’s market which I show as the last line on my second chart, marked in red, showing the market we have been in since August 2000.  It started with the Dot Com Crash however we were unable to reach a new real high before the Global Financial Crisis took hold and we entered what is now being called the Great Recession.  I started discussing this period back in January 2010 and unfortunately things haven’t moved far since then.  At that time we were sitting at -38.1% and in 2.5 years we have only moved to -33.0%.  The good news is that I can’t yet call this period a severe stock bear market as we ‘only’ reached -58.6% in March 2009.  The bad news is that we are only 142 months into this one, which if history is any guide, leaves us plenty of time yet to see a severe stock bear market.  What will cause it?  There are many possibilities including Quantitative Easing leading to big inflation or Spain going bankrupt.  As always, I don’t claim to have any idea.  All I know is history suggests there is still plenty of time for it to occur.

As always DYOR.

Assumptions include:
-Inflation data from the Bureau of Labor Statistics.  June 2012 inflation is extrapolated.
-Prices are month averages except June 2012 which is mid market S&P 500 price on the 14 June 2012.