Waking the Bear

Some experts are worried that the market rumblings being heard are really the sounds of the bear market coming out of its long hibernation. The strong bull market that dominated the 1990s has come to an end, they say.

It has been more than 20 years since the United States experienced a true bear market, so some investors may not even recognize the term. In general, a bear market is a long period of declining stock prices. (A bull market is a long period of increasing stock prices.) The Wall Street Journal defines a bear market as satisfying any of the following three criteria: The Dow Jones Industrial Average is down 30% after 50 days; the Dow is down 13% after 145 days; or the Value Line Composite index declines 30%.

Bear vs. crash

A bear market is different than a "crash". A crash is quick, usually occurring over only a day or two. For example, on Oct. 19, 1987, the Dow lost 22.6% of its value, dropping to 1,738.74 from 2,246.74. It fell 36.1% from the record high of 2,722.42, set Aug. 25, 1987. But it rebounded fairly quickly. By Aug. 28, 1989, the Dow had reached that record high again, and it continued to climb throughout the ’90s.

A bear market is a longer-term trend. The last big bear market in the United States started in 1973. The Standard & Poor’s 500, which is a broader index than the Dow because it measures 500 stocks instead of 30, shows the extent of that bear market. The S&P 500 peaked in January 1973 and then fell for 21 months, dropping 50% over the period. It did not regain its pre-bear high for more than seven years – until July 1980. After the most famous bear market in history the Great Depression – it took the market 25 years to regain the highs it set before the crash of 1929.

The current market

Compared with these historical bears, and based on the Wall Street Journal criteria cited above, we are not experiencing a bear market now. The Dow has risen above 11,000 points several times, and a 30% drop from 11,000 would mean the Dow would have to sink 3,300 points, to 7,700. Even a 13% decline would mean the Dow would drop to 9,570 – and stay there or fall still further. Neither of these has happened, as of November 15, 2000.

However, it seems clear that stock market growth has slowed down. No longer do we see the double- digit growth that has characterized the last several years. And stocks in some industries have experienced double-digit declines.

Could this become a bear market? Maybe, some observers say. And, they add, even if it doesn’t become a bear market, it is no longer a bull market.

Now what?

Should the possibility of a bear market drive you out of stocks? Your decision about how to allocate your assets depends on many things, including your goals and your investment time horizon, as well as the state of the market.

If you are a long-term investor, the market outlook for the next several years may not matter much. Historically, over the long term, stocks have delivered considerably higher returns than any other investment class, although past performance is no guarantee of future results.

However, if you need your money soon, or you no longer need to target the higher return of a long-term approach, you may want to consider moving some of your assets into bonds, which historically have performed better when stocks drop.

Remember that the stock market has gone through many bull and bear cycles. The best advice, most experts agree, is to watch the market, but not be a slave to it. Focus on your own goals and how you need to invest to reach them.

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