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This is not meant to be alarmist message but rather to illustrate how historical bear markets have behaved and also, to balance what seems to be a far too prevalent nonchalant calm about what is going on in the markets.
Although the classic definition of a bear market is a 20% decline, there is no reason why a falling market should stop at that limit.
In fact, previous bear markets have been much more devastating. As mentioned in the most recent edition of Barron’s, out of the last 10 bull markets (from 1940 onwards), only 3 other bull markets have not erased 50% or more of the gains they provided. The average bear market has delivered a 30% decline (for the Dow).
Back in late June 2008, Paul Desmond, of Lowry’s Research was quoted in Barron’s:
“We think we’re still quite a ways from a bottom,” Desmond warns. Over the next year, he expects the Dow to fall 30% to 50% from its October ‘07 top. The market could enjoy a few short-lived rallies during that span, like the one we experienced from March through May. But each rally is apt to result in a lower high and a lower low in the market.
What would a 30% or 50% decline look like?
The S&P 500 Index (SPX) reached a top in October at 1565 and its 2002 low was 777. Which means that the bull market gained 788 points - the market doubled, in other words. But now we’ve lost ~50% of those gains.
And if we fall 50% from the October 2007 we would be slightly under where the S&P 500 Index found its bear market footing way back in early 2003. A complete round trip.
I’m not predicting that will happen - no one knows where the market will be, of course. The point is that such a scenario has happened in the past. and is far too probable than most people would imagine.
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