Even though each bear markets seems unique, investors can gain some perspective if they review the similarities of bear markets over the last fifty years – a period during which we have faced ten particularly challenging intervals in market conditions, including the one we are now experiencing. Approximately every five years, the market enters a period of correction that is a natural process of the risks and rewards of capitalism, and each time, we have recovered from the slump in the cycle.
To better understand these patterns from a historical perspective, consider three of the most recent bear markets:
January 11, 1973 to October 3, 1974
The causes of the economic fright experienced by Americans in the 1970s include the Vietnam War, Watergate, an oil embargo, a double digit unemployment rate, and a 16.8% increase in the cost of living. Over the course of 23 months, the market lost 45% of its value, and many investors eventually turned to the safety of CDs and bonds. Such extreme conditions had not been experienced in the United States since the Great Depression.
A 1974 Time magazine cover stating “Recession’s Greetings” reflected the fear of the nation, and the cover story’s title prophesied “Gloomy Holidays – and Worse Ahead.” The article begins, “Not for many years has a Christmas season begun with so many tidings of spreading discomfort and lack of joy about the U.S. economy. Already wracked by a devastating double-digit inflation, the nation is now also plunging deeper into a recession that seems sure to be the longest and could be the most severe since World War II.”
Despite Time’s grim predictions, economists now agree that December 1974 actually marked a turning point in the U.S. market: the S&P 500 soared 37.2% and 23.9% in 1975 and 1976 respectively.
August 26, 1987 to December 4, 1987
This bear market was as extreme as it was short. On a day known as Black Monday, the crash of markets around the world on October 19, 1987 also sent the Dow Jones Industrial Average plummeting 22.61%, which is still the largest one-day percentage decline in history. (In contrast, the stock market crash of 1929 included only a 12.82% decline on its Black Monday.) As in 1974, the plummet of the Dow panicked many investors who desperately looked for financial safety elsewhere.
Again, Time magazine provided another cover story depicting Americans’ dismay. One story presented an hour-by-hour account of events, and another argued that “the U.S. . . . could not go on forever spending more than it would tax itself to pay for, buying more overseas than it could earn from foreign sales, and borrowing more abroad than it could easily repay. There had to be a day of reckoning, and it could unhinge the whole world economy.” The disapproval and pessimism of this seemingly timeless statement gave investors little hope for the immediate future. However, almost half of the Black Monday losses were recovered in the days following the sell-off, and less than 3 months later, the S&P 500 finished the year up 2.3%. Overall, the 1980s ended with a compound return of the S&P 500 of 17.6%.
March 24, 2000 to October 19, 2002
While many people remember the crash of the stock market following the September 11 terrorist attacks, this multi-event decline actually began with the earlier bursting of the technology bubble in 2000. By October 2002, at the end of an exhausting 28 month period, the S&P 500 had lost 49.2%, and a young generation that had previously felt indestructible suddenly felt very vulnerable. The September 14, 2001 Time magazine cover depicts the World Trade Center’s Twin Towers in the final moments before their collapse.
One of the many signs that our country had come to a complete halt was the closure of the New York Stock Exchange for 4 days after the attacks. Once the markets reopened, the Dow Jones Industrial fell more than 17% over the course of a week.
In 2001, the United States and its economy was vulnerable to outside forces and to the loss of it’s strong technology sector because of the exposure of hidden greed in corporate America. 2002 was defined as the year corporate titans WorldCom and Enron collapsed and the year that $2 million birthday parties funded by the corporate dollars of Tyco ended. As dark as the outlook was following the collapse of the technology bubble and the devastation of September 11, the markets eventually recovered: the S&P 500 appreciated 14.3% in value between early 2003 and late 2007.
Despite oil embargos, double-digit inflation, the burst of the 1990s technology bubble, and September 11, the past 35 years have produced a whopping appreciation of 3,725% in the S&P 500. Investors cannot invest directly in the S&P 500, but if they could have invested $100,000 in the early 1970s, their investments would potentially have appreciated to over $3.7 million during those 35 years, assuming that our hypothetical investor had not fallen victim to the greed and emotionally-driven behavior that plagues the average investor. Though a natural response is to panic when facing a challenging bear market, we are less likely to make faulty decisions if we can keep such market fluctuations in perspective.
This article is the fourth in a series of lessons about the barriers investors face as they work to achieve financial security. Previous articles introduced the series and outlined the ways investors’ behavior impacts their decisions. The next article will explore the psychological tendencies of investors and the challenge of overcoming such tendencies as we explore the emotional and intellectual responses a number of investors experience as part of the investment process.
- James E Wilson, CFP®
This is the third chapter to a seven part series on the Barriers to Financial Security. To download a full copy of the whitepaper, click here
