The Weight Of The Bear

The Dow Jones Industrial Average gained 10.6% in October 2002—the sharpest gain for the market barometer since January 1987. If that turns out to have marked the end of the bear market, then it must be time to look back and see just how bad things were. By almost any measure, they were pretty awful, but it could have been worse. Here are a few facts, and a little perspective.

The latest decline was among the longest, though not the deepest, in modern market history. If it felt like this bear market was taking a thousand days to hit bottom, that’s because it was. From January 14, 2000, when the Dow achieved its peak, until October 10, 2002, when it may have reached its nadir, was exactly 1,000 days. The Dow lost 36.7% of its value during that time. The Standard & Poor’s 500 index, which peaked a couple of months later, had dropped 48.6% by October 7.

The worst plunge in the Dow last century, ending on July 8, 1932, bottomed out after 1,001 days; during that time, its value dropped by 89.2%. The S&P 500, during the same dismal stretch, lost 86.2% in 998 days. During the second-worst 20th century bear market, the Dow fell by 46.6% during 660 days in 1973-74, while the S&P 500 slumped 48.2% in 630 days.

Of course, this bear’s decimation of the Nasdaq Composite was the worst in its history, clawing away more than 77% of the index’s value on March 10, 2000, when it recorded its all-time high. (Sources: Bloomberg Financial Markets, The New York Times, Smartmoney.com.)

In real terms, we’ve gotten off easy, at least so far. As devastating as these losses have been, at least they have come during a time of minimal inflation. That wasn’t the case from 1966 through 1982, when the Dow lost an average of 1.5% per year while the cost of living soared. If you take inflation into account, that long market decline (interrupted by several temporary respites) amounted to annual losses averaging 12%—for more than 16 years. In real, not nominal, terms, the value of a portfolio invested in the Dow would have lost almost 88%. (Source: Barron’s.)

Past performance is no guarantee of future results. Indices (DOW, S&P 500) are unmanaged. One cannot invest directly in any indices.