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

I first started posting today’s charts back in January 2010. I ended that post with “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.” Well that day could be now be upon us. We know that many countries out there are today all but ‘bankrupt’ or in the very least are now talking about and implementing austerity measures. So that writes off stimulation via borrowing at least for the moment. I assume that some countries out there would have another go at borrowing if they really needed to although it would be interesting to see what sort of treatment the bond markets would give them this time around?

We also know that, for example, we have some pretty ‘healthy’ inflation going on in the UK right now so that also writes off quantitative easing for now also. US inflation is much more subdued and some are even arguing that the US has deflation just around the corner. I’m sure though if push came to shove they would all have another go at quantitative easing however again how would the bond markets respond to this? I’m guessing that they might think governments want to take the easy way out and try to inflate their problems away.

Of course that’s all hypothesis so I will just look at what is happening today and it really doesn’t make for happy reading. Firstly, as I do every month I’ll cover the background to today’s charts for the new readers of Retirement Investing Today.

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). (http://retirementinvestingtoday.blogspot.com/2010/01/history-of-severe-real-s-500-stock-bear.html)

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 -45.5% down from -40.6% at my last update. The question now is will the market parallel the purple line of 1906 to 1926 and head toward -70%? We are now 9 years and 11 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 -27.0% and over the next year heading to -41.4%.
- in 1939 at -53.1% and over the next year heading to -60.6%.
- in 1978 at -50.0% and over the next year heading to -53.7%.

I’m going to keep watching this comparison as I think it continues to get more interesting by the month. Could we yet see that real -60% bear or even a -70% or -80% bear? History suggests there is still plenty of time for it to occur.

As always do your own research.

Assumptions include:
- Inflation data from the Bureau of Labor Statistics. June 2010 inflation is extrapolated.
- Prices are month averages except June 2010 which is the 02 July 2010 S&P 500 stock market price.
- Historic data provided from Professor Shiller website.