A History of Severe Real S&P 500 Stock Bear Markets – May 2010 Update

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 briefly what were these bear markets (full details here).

The first severe stock bear (marked in purple on the chart) market started with a new real high being reached in September 1906 and incorporated the 1907 Bankers Panic. 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 and is obviously the period of the Great Depression. The markets passed through -60% on a number of occasions. In June 1932 the market reached 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. 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, incorporated the stock market crash of 1973 to 1974 and the 1973 Oil Crisis. From the market 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, as always, 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 have been unable to break through -60% ‘only’ reaching -58.6% in March 2009. That is a period of only 8 years and 7 months.

As the second chart clearly shows we have now turned back below the -40% line to be at -40.6% down from -36.3% last month. The question now is will the market follow the olive line of 1968 to 1988 and head toward -70%? We are now 9 years and 10 months into this severe bear market which is a relatively short period of time compared with the other severe bears shown. The previous bears all went below -60% in the years to come and at this point were:

- in 1916 at -26.0% and over the next year heading to -40.6%.

- in 1939 at -54.2% and over the next year heading to -62.1%.

- in 1978 at -47.9% and over the next year heading to -51.5%.

I’m going to keep watching this comparison as I think it continues to get more interesting by the month. Governments around the world are fast running out of borrowing capacity as Greece has aptly demonstrated. The EU and IMF have then aptly helped Greece by borrowing money to give to them. Current government borrowing must be contributing greatly to the ‘growth’ that is being seen however most governments have now maxed out the credit card. How close is the UK to be in the same position as the PIGS or should that be the UPIGS?  Could we yet see that real -60% bear? 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. April and May 2010 inflation is extrapolated.
- Prices are month averages except May 2010 which is the 17 May 2010 S&P 500 stock market price at 1800 GMT.
- Historic data provided from Professor Shiller website.