The Investment Scientist

Bear market: how long will it last?

Posted on: July 30, 2008

It’s official. On July 9, US stocks slid more than 20% from their October high, sending the S&P 500 into bear market territory. Even earlier this month the NASDQ and Dow Jones turned bearish following the Russell 2000, an index of small caps, which lead the decline.

How long will this bear market last?

Well, I don’t have a crystal ball, but I do have a rear view mirror.

Since 1960, there have been ten bear markets (see Table). The worst bear market took one-and-a-half years to reach bottom. Four reached bottom within a month. The remaining five hit bottom between one and ten months. On average, it took 4 months to reach bottom.

Date of entering bear market Months to bear bottom 1 year return from entry 3 year return from entry
2/26/2001 19 months -11% -8%
10/8/1998 < 1 months 38% 12%
10/17/1990 < 1 months 33% 59%
10/19/1987 2 months 3% 13%
3/1/1982 5 months 34% 63%
3/6/1978 < 1 months 13% 49%
12/10/1973 10 months -32% 9%
1/26/1970 4 months 10% 35%
10/3/1966 < 1 months 28% 24%
5/28/1962 1 month 20% 51%
Average 4 months 14% 31%

Data source: Moneycentral.com

Now that we are in a bear market, shall we move to cash?

I don’t recommend it. Here’s why. From the day the S&P 500 entered a bear market, on average it returned 14% in one year and 31% in three years.

Let’s look at the distribution of returns. This is important. Among the ten one-year returns, two were negative, yet three were over 30%. As for the three-year returns, only one was negative but three were over 50%!

I don’t know about you, but I like those odds.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



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