Bear market: how long will it last?
Posted on: July 30, 2008
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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.
The Investment Scientist 
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