Wednesday 18 August 2010

The Lost Decade – History of Severe Real S&P 500 Stock Bear Markets – August 2010 Update

At my first post on this topic, back in January 2010, looking at severe real S&P 500 bear markets I postulated whether once the governments of the world stopped stimulating their economies through borrowing and quantitative easing whether we could see a real -60% bear market from the previous high within this economic cycle. Well as I highlighted here there still seems to be life in governments (or their agencies) yet with the recent QE Lite announcement.

The economy that seems to have been created from all the manipulation seems to be allowing walking dead companies (I rank a lot of banks under this category, particularly some of the European banks and their nonsense stress test results) to survive rather than quickly clearing the dead wood and allowing young saplings to start in their place. A classic example of this (as highlighted in last weeks MoneyWeek) is to look at the US with its Fed creating out of thin air (quantitative easing) 1.3 trillion dollars by buying government bonds and other assets. However in parallel to this the banks have deposited 1 trillion dollars with the Fed, rather than lending it out, as they frantically try and rebuild their balance sheets.

So we have a manipulated economy in which the banks hoard cash to pay for future losses that they must be expecting but aren’t saying anything about. At the same time we are seeing articles like this looking at the future postulating that we may not see a double dip recession but rather something worse, a lost decade. Its easy to see how this hypothesis is arrived at however today I’m not even going to talk about the future. Instead what about the last 10 years? If you owned S&P 500 shares it’s already been much worse than a lost decade. The S&P 500 as I write this post is hovering around the 1,100 mark. To put that into perspective the S&P 500 when looking at nominal monthly average pricing first passed the 1,100 mark in April 1998. Sure companies have paid dividends over that time but importantly, when assessed by the market, in over 12 years, companies have not been able to achieve any growth that results in them being valued any higher. Of course when you take out inflation to put things into real terms it is much worse.

As I do every month today’s post looks at exactly this. Real inflation adjusted long term bear markets. Firstly though as always let’s cover the background to today’s charts for the new readers of Retirement Investing Today which includes looking at other severe S&P 500 bear markets as a comparison.

Today’s first chart shows the real (inflation adjusted) S&P 500 (or its predecessor) stock market from which 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, it then proceeded to lose in excess of 60% of its 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 with the full background 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 today we still remain below the -40% line at -41.3%. The question remains will the market parallel the purple line of 1906 to 1926 and head toward -70% to join its 1929 and 1968 cousins? We are now 10 years and 1 month 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 -25.5% and over the next year heading to -47.9%.
- in 1939 at -49.9% and over the next year heading to -58.8%.
- in 1978 at -52.7% and over the next year heading to -53.2%.

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. July and August 2010 inflation is extrapolated.
- Prices are month averages except August 2010 which is a 17 August 2010 intraday S&P 500 stock market price of 1097.16.
- Historic data provided from Professor Shiller website.


  1. 9 years and 13 months, LOL

  2. Hi Anonymous
    Thanks for pointing that out. Too much time analysing data and not enough time proof reading :-)

  3. Could you please post an update to the second chart? I've been watching this, and it looks like we are on the verge of breaking above the purple line, rather than spinning downward. Though as you said, there is still plenty of time. Thanks.