Bear Markets

The average bear market since 1940 lasted 386 calendar days (about 13 months) with an average peak-to-trough decline of roughly 30%. According to Bespoke Investment Group, historically, an average 74% of the bear market was complete (in terms of the number of days the bear market lasted) by the time the market hit official bear territory of –20%. In fact, three of the 11 bear markets (1948–1949, 1956–1957 and 2002) ended within 13 days of crossing the –20% threshold while just one hit –20% when the bear market was less than half over (1946–1947).

Getting back to breakeven was a longer path, but the range was wide around the average 1,177 days (3.2 years) it took the market to get back to its old highs. It took the least amount of time after the 1966 bear market and the longest after the most recent 2000–2002 bear market. And remember, the percentage increase on the way back up beats the percentage drop on the way down. After a 30% drop, a return to breakeven represents a 43% move higher. Panicking out at the bottom of bear markets means a lot of missed opportunity on the way back up.

[3/27/08] Beginning on March 6, the Dow lost 515 points over three days, followed by a 417 point surge the next day, then dropped 200 points a few days later, before soaring 420 points two days after that, only to lose nearly 300 points the next day, before jumping over 230 points the day after that!

If your head is spinning and you are wondering what to do now, you are not alone. Those two big 400+ point up days are often seen near market bottoms. In fact, 4 of the best 10 days from 1988-2007 came in the second half of 2002 as the 2000-2002 bear market was reaching its bottom. [via etrade]