If Bear Markets Decline on Average -30%, Shouldn’t This One be Two-Thirds of the Way Over?

(this week’s stock market outlook)

I was watching an analyst on Fox News channel give his analysis of the current bear market. Yes, now we can call officially call it a bear market after the now greater than 20% decline in at least the Dow Jones Industrial Average.

It would make sense. If you have lost around 30%, that should mean it is over. Well, unfortunately, it doesn’t quite work that way. Most bear markets don’t decline in a straight line and then end. It is much more complicated. There are two other elements at work during a bear market – volatility and time.

Let’s take a look at the last three major bear markets.

2000 Bear Market 664 Market Days
1973 Bear Market 505 Market Days
1968 Bear Market 464 Market Days

To date, we are only 160 days into the current bear market.

It is the journey of the bear that is brutal for investors. The volatility is tough. Consider this journey for the S&P 500 during the 2000 bear market.

Go to the stock market outlook to see the real story of the ups and downs of the stock market.

During that bear market period, the S&P 500 declined over -20% on three different occasions. A bear market declines over a period of time then recovers for a certain period of time only to start declining again. This repeats over and over until the bear market completes.

One of the tactics of the financial service industry is to convince investors that it is all about the percentage lost or gained. What they fail to communicate is the importance of the loss of time to the equation. If you were invested in the Dow Jones, you would now be -3.7% below the high set back in 2000. This is what happens, bear markets take it away, bull markets give it back, and then bear markets take it away. This is why buy and hold is a tough strategy to justify.

Yes, I do acknowledge that this bear market could be of the milder type. However, I believe it is a low probability. It would be hard to imagine that with the issues we are facing today that it is going to be just a mild one.

Copyright © 2008 Prudent Money and Bob Brooks. All rights reserved.