Are there any takers?
The major stock indexes ended the first half of the year perilously near bear market territory — traditionally defined as 20 percent below a recent peak. They’ve since toppled on into the bear’s den.
The Dow Jones industrial average ended June at 11,350.01, down 19.9 percent from its all-time closing high of 14,164.53 reached last Oct. 9.
The Standard & Poor’s 500 stock index ended June at 1,280, down 18.2 percent from its recent high of 1,565.15 reached Oct. 9.
And the Nasdaq composite index closed June at 2,292.98, down 19.8 from its cyclical high of 2,859.12 reached Oct. 31.
By now everyone should understand the reasons for the stock market air pocket.
The subprime mortgage mess has metastasized into a full-blown credit crunch as lenders write off bad debts and look askance at making new loans. The housing market hasn’t bottomed out yet. Soaring oil prices are pinching both business and household budgets. And signs of resurgent inflation are preventing the Federal Reserve from cutting short-term interest rates any more.
The faint of heart might want to just pitch those quarterly 401(k) statements when they show up in the mail over the next couple of weeks. Unless you’re really riding the commodity bull, chances are you’re notably poorer than you were just a few months ago.
So, how deep and long will the bear market be? That’s really hard to say because each downcycle is unique, and this one has the feel of a particularly long grind. But history can offer us some guidance.
According to Ned Davis Research of Venice, Fla., nine bear markets since 1960 have witnessed an average 31.1 percent decline in the Dow Jones industrial average. The depth of those bear markets ranged from 21.2 percent in 1990 to 45.1 percent in 1973-74.
In terms of length, bear markets since 1960 have lasted an average of about 14 months, according to Ned Davis Research. The longest bear market was the 37.9 percent knee-wobbler that lasted from January 2000 to October 2002. Based strictly on historic averages, don’t be at all surprised if stocks fall another 10 percent or so. And don’t be shocked if it gets worse than that before it gets better.
So, what can we take from all this now that we’re in the bear’s clutches?
Diversification is a good thing. Investors who have a balanced approach that includes bonds and some alternative investments in commodities and the like will feel a lot better about their midyear statements.
Fortunate sector weighting can take some of the sting out of the bear market. Over the year ending June 30, Standard & Poor’s notes, the energy sector increased 23.1 percent while the financial sector plunged 44.2 percent. The broad S&P 500 index fell 14.9 percent over the past year.
Time also tends to heal. Thankfully, bull markets usually follow hard on the heels of bear markets.
Ned Davis Research notes that the Dow posts an average 31.8 percent surge during the 12 months following the bottom of a bear market. The 12-month recoveries following the last nine bear markets have ranged from 8.7 percent to 51.4 percent.
For now, though, we’re in a bear market, and it’s likely to go lower and last a while longer. And while dollar cost averaging is always sound advice, there’s no compelling reason to throw extraordinary chunks of cash at the market any time soon.
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