Anatomy of a Bear Market

Terry Savage, Tribune Content Agency on

It’s been a long time since we had a real bear market, and memories of pain fade amid subsequent gains. For a generation of recent investors, and those with short memories, some perspective is in order.

In the past 3 years, the entire stock market outperformed its historic averages. Over the past 75 years, the average annual return of the S&P 500 (including dividends) has been 10%. But returns for the past three years have averaged around 17%! This was an impressive bull market.

But the law of averages suggests that things will even out over the long run. And that means there could still be significant declines ahead.

Most new investors automatically assume they can “beat” the market — jumping in and out of individual stocks based on the “action.” And they assume that any dip is a “buying opportunity” — a chance to get in before the eventual rebound.

Now they’re going to learn what happens when you can’t easily touch bottom. They might even stay underwater for longer than they can hold their breath!

There have been eight bear markets in recent history — going back almost 100 years to the famous bear market that started in 1929. That sickening drop took 34 months — almost three years — from peak to bottom. And the total decline was 83%! It was, by far, the worst bear market in modern history.


But other bear markets have rivaled it for they pain they caused — including the the two most recent bear markets. The bursting of the dot-com bubble in September 2000 lasted two years until the bottom was finally reached. The S&P 500 lost 45%, but the Nasdaq fell nearly twice as much. And some stocks never came back. Just think of the sock puppet!

And how could we forget the frightening financial crisis that occurred less than 15 years ago? The broad market averages lost 51% between November 2007 and February 2009. And it took 37 months — over three years — to rebound.

But today, many who are trading crypto and meme stocks and the tech complex are just now learning those lessons for themselves. The real question is whether they will ride it out — or give up and sell all at once in a panic. That’s what historically makes a market bottom.

Intellectually, we can tell ourselves that every bear market has eventually bottomed. And that after every bear market a new economic cycle brought renewed growth and higher prices for stocks. But you can’t pay the mortgage with intellectual property.


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