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1997-98: REVIEW AND OUTLOOK

Bears Come and Go--What Really Matters Is the Size of Their Bite

January 04, 1998|TOM PETRUNO | TIMES STAFF WRITER

How bad could it get?

For many stock investors, the question of whether a bear market might hit Wall Street in 1998 isn't as important as the question of severity.

The market overall has generally been in a rising cycle since 1990, and most investors probably understand that at some point a significant decline will occur--as it has with some frequency throughout Wall Street's history.

A bear market is usually defined as a decline of 20% or more in key stock indexes such as the Standard & Poor's 500 and the Dow Jones industrial average.

There have been nine such bear markets since World War II, lasting 11 months on average (from the market's peak to its bottom). The average S&P 500 loss: 28%.

Some analysts, however, believe that a decline of 15% or more constitutes a bear market. There have been 15 such declines since World War II. Counting the 15%-to-20% pullbacks, the average bear market decline in the postwar era falls to 24%, and the average duration falls to eight months.

But those averages mask significant differences among bear market cycles. Some, obviously, have been far worse than others.

The worst bear market of the postwar era occurred in 1973-74, when the S&P 500 lost nearly half its value over a 21-month period.

By contrast, the 1990 bear ran its course in a mere three months and sliced 20% off the S&P.

*

What sets off bear markets? Each decline is unique in some aspects, but generally it is caused by a "shock" of some kind that frightens investors and/or reduces the appeal of stocks versus other investments.

The 1961-62 bear market was fueled in part by President John F. Kennedy's attack on steel companies over rising steel prices.

In 1973-74, stocks were pounded by soaring inflation and interest rates, among a host of other nightmares.

In 1990 the trigger was Iraq's invasion of Kuwait, which caused an economic recession in the U.S.

The bear markets now ravaging most Asian stock markets are among the most severe since the global Great Depression in the 1930s. The Thai market, for example, has dropped 74% from its 1996 peak. The South Korean market is down 62% from its 1996 high.

Could a bear market of that magnitude hit Wall Street? It's possible, of course--but probable only if the U.S. economy were to again spiral into a true depression, many analysts argue.

From 1929 to 1932, at the start of the Great Depression, the Dow average lost a stunning 89% of its value.

But what is often lost in these discussions is that bear markets present tremendous opportunities for investors to pick up many stocks at bargain prices--if he or she has the cash to do so.

In the 1930s, even as the Depression wore on for many Americans, those who had the wherewithal and the foresight to invest enjoyed spectacular gains as the Dow rocketed from its low of about 41 in 1932 to nearly 200 by 1937, a nearly fourfold increase.

Still, there is no minimizing the financial and psychological pain that bear markets cause as investors watch their portfolios tumble in value. Which is why many financial advisors, worried about the potential for a genuine bear market this year, suggest that individual investors ask themselves two simple questions:

* Could you cope, psychologically and financially, with a decline of 20%, 30% or more in your stock portfolio? In other words, could you afford to ride it out?

Even though bear markets tend to be over quickly, note that it has taken 2.8 years, on average, for the S&P 500 to fully recover its bear market losses in the postwar era.

* If you believe that a significant decline is coming, will you have cash available to take advantage of it? If not, and you now hold a stock portfolio that has built up large gains, it may be prudent to sell a portion of your stocks--perhaps 20% or 30%--and shift that into a money market account, bonds or other "safer" securities that could later be tapped to invest in stocks at lower prices.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

When the Bear Comes Calling

This chart shows how bad things can become in the stock market when a full-blown bear cycle is underway. Since World War II there have been nine declines of 20% or more in the blue-chip Standard & Poor's 500 index. The average decline was 28%, and the average duration of these bear markets was 11 months. The average time to full recovery, measuring from the market peak to the point at which all of the bear market decline was recouped, was 2.8 years.

*--*

Bull market S&P 500 decline, Duration Years to full recovery peak (year) peak to trough of decline from market peak 1946 -28% 5 months 4.1 1956 -22 15 months 2.1 1961 -28 6 months 1.8 1966 -22 8 months 1.4 1968 -36 18 months 3.3 1973 -48 21 months 7.6 1980 -27 19 months 2.1 1987 -34 3 months 1.9 1990 -20 3 months 0.6 Average -28% 11 months 2.8

*--*

Source: Society of Asset Allocators and Fund Timers

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