Bear markets are naturally unpopular: people dislike seeing their investments go up in smoke. They are also misunderstood. It is commonly believed that bear markets are short-lived, ending after a few unpleasant months. That’s true of little bears, but great bears can hang around for a decade or more. They are characterised by the savage crushing of investors’ hopes. Most commentators argue that British and US investors hadn’t until very recently experienced such a market for more than quarter of a century. Actually, we are already some years into one.
A bear market is classically defined as occurring when a stock market index declines by 20 per cent or more from its previous peak. If you take this narrow measure, America and many other major markets recently entered a bear market—the US in early July. Yet this accepted definition is misleading—applying only to little bears and not their much more terrifying great bear kin. Andrew Smithers of research firm Smithers & Company argues that “bull” markets should be seen as periods when stocks become ever more expensive. By contrast, bear markets are when stocks become progressively cheaper. Since 1900, the US stock market has peaked in value five times. The period between the peak and trough—the great bear market—lasts on average 12 years, says Smithers.
During these quarter-century cycles, there are many times when share prices have oscillated by more than 20 per cent from their prevailing trend—whether up or down. But these little bears are just blips in longer market trends. For instance, US equities fell 27 per cent during the so-called “Kennedy break” of 1962. But this only momentarily interrupted the long bull market that ran nearly two decades from 1949. Nor did the crash of October 1987 usher in a great bear market. After surviving several assaults, the long bull run that commenced in August 1982 finally expired in early 2000.
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