Sunday 28 November 2010

There’s still plenty of time for -60% – History of Severe Real S&P 500 Stock Bear Markets – November 2010 Update

I haven’t updated my History of Severe Real S&P500 Stock Bear Markets since August 2010. At that time QE Lite had only recently been announced. That strategy kept the dead US patient alive for 3 short months before the next load of stimulus, Money Printing 2 (sorry Quantitative Easing 2). Let’s put the $600 billion involved in QE2 into perspective. It’s the equivalent of $1,950 for every US man, woman and child. I was always taught “that nothing comes for free”. In parallel to this I also can’t help but think about Newton’s first law, “every action has an equal and opposite reaction”. As an Average Joe I’m just wondering what the penalty and opposite reaction will be. I guess time will tell but I still can’t help thinking it’s not going to be good.

So where are we today when compared with other real (inflation adjusted) long term bear markets? As always let’s firstly 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.

Now let’s update 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 shows today we are again back above the -40% line at -36.3%. In fact the price today in inflation adjusted terms is around the same as we saw back in June 1997. So in 13 years we have seen absolutely no capital gain other than fake gains brought about from the devaluation of money. We’re now not far off crossing the purple line of 1906 to 1926. The difference for now is we are heading upwards while the 1906 bear at this equivalent point was on the downhill run to -70%. We are now 10 years and 4 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 -27.9% and over the next year heading to -57.6%.
- in 1939 at -51.2% and over the next year heading to -58.7%.
- in 1979 at -52.2% and over the next year heading to -56.4%.

So while they were in very different places today after 12 short months they were all about as bad as each other and were all still heading towards the -60% line. This bear market also has plenty of time to make -60% or worse and given what’s happening out there in the real world with some countries being not far off default I wouldn’t be the least bit surprised to see it.

As always do your own research.

Assumptions include:
- Inflation data from the Bureau of Labor Statistics. November 2010 inflation is extrapolated.
- Prices are month averages except November 2010 which is the 24 November 2010 S&P 500 stock market price of 1198.35.
- Historic data provided from Professor Shiller website.


  1. Hi RIT

    Sadly I'd have to agree with you. The US is still quite pricey and they do seem to have these big risks of weak growth and/or high inflation, both of which can spell 'real' pain for investors over a very lengthy period of time.

    However, as long as a US investor allocates their capital somewhat rationally then they should still do okay in my opinion. It's that 'rational' bit that's the hard part.

    And congratulations on the 50% target. I think if I smudge various factors then I am somewhere over 50%, but it depends on what you want your 'retirement' income to be! Unfortunately I like fast cars so my retirement is some way off!

  2. Hi UKVI
    I also like fast cars however I've realised that if I want 'retirement' in my early forties then the odd track day is about as close as I'm going to get.

  3. Very interesting graphs and commentary RIT. I particularly appreciate seeing the graphs in real terms, and that you've gone back to 2000 rather than 2007 like most commentators as the start of this bear market.

    Couple of contrarian points:

    1) I suspect inflation was running much higher in those previous bear markets, masking a lot of the decline. It certainly was in the 70s. This may of made it psychologically more difficult for investors at the time to see the value after the falls, and so perpetuated them. (Not to mention the returns from alternative asset classes like cash being higher in such circumstances, even if money illusion was at work).

    2) There's a bit of confirmation bias here. If you plotted the current bear markets with other bear markets that bounced back sooner, you'd have an equally convincing looking graph, surely.

    Anyway, keep it up! :)

  4. Hi TI

    I too am amazed that so many commentators start with 2007 rather than 2000. It really is not that difficult to put things in real terms and show the truth, yet the vast majority of people out there seem to ignore inflation for some reason.

    It's a similar story with gold where they talk about new highs when in real terms we are still some way off.