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The Unbearable Question: Was It Really a Bear?


With the Dow Jones industrial average just a 3.3% move away from a new all-time high, Wall Street is debating a record-book question: Was the downturn the market suffered in recent months the shortest "bear" market in U.S. history?

It should be a simple matter to decide--but it isn't.

That's largely because, as horrendous as the plunge was for many individual stocks, the two main blue-chip indexes--the Dow and the Standard & Poor's 500--came very close to but did not breach, on a closing basis, the 20%-loss threshold that constitutes a true bear market by most analysts' standards.

The Dow's lowest daily close in the slump that began in late July was 7,539.07 on Aug. 31. That was a 19.3% drop from the record-high close of 9,337.97 set on July 17.

For the S&P 500, the lowest daily close also was reached on Aug. 31, at 957.28. That also was a 19.3% decline from the S&P peak on July 17.

So what? some analysts say. Most stocks lost at least 20% between July and October. It had to be a genuine bear.

Moreover, measured on an intraday basis, both the Dow and the S&P hit the 20% bear-market threshold. In a deep sell-off on Oct. 8, the Dow fell to 7,467.49 at its low point for the day, before rebounding by the close. At that low, the index was down precisely 20% from its July peak.

For those investors willing to view 19.3% as close enough to 20%, the Dow's drop from July 17 to Aug. 31 was the shortest bear market ever for U.S. stocks: 45 days.

The last bear market, in 1990, began on July 18 of that year and ended Oct. 11, taking the Dow down 21%, from 2,999.75 to 2,365.10 in 85 days.

The bear market before that--the 1987 bear, which included the worst one-day crash in history--began Aug. 26 and ended Oct. 19, for a 36% decline in 55 days.

What's clear is that the bear markets of the last 10 years all have been very different from most of those that preceded them, in that they have been extremely short, relatively speaking.

The average bear market in blue-chip stocks from 1929 to 1990 (there were 13) lasted 17 months, which must seem like an eternity to modern investors.

Smaller stocks' bear markets also have traditionally been more drawn-out affairs. But the bear market in the Russell 2,000 small-stock index this year, while longer than the blue-chip bear, also was very short, historically.

The Russell index peaked on April 21 and bottomed on Oct. 8, losing 37% in that period. It's up 26% since then.

Does it matter whether this year's blue-chip decline was an official bear market?

Purists might say so. But then, the U.S. market has been breaking all sorts of long-held "rules" in the 1990s, upsetting people who like to pigeonhole it.

Richard McCabe, market analyst at Merrill Lynch in New York, argues that even if blue-chip indexes soon overtake their old highs, if they drop again to fresh lows in the first half of 1999--as he expects--the 1998 and 1999 declines should be considered one bear market.

The bigger question is, why have the market's downturns of the last 10 years been so short?

Certainly, technology speeds the flow of information and speeds up investors' reaction time to good, and bad, news.

But James Stack, editor of InvesTech, a market newsletter in Whitefish, Mont., argues that the market also has benefited from a Federal Reserve that seems intent on quickly "bribing" the bull market back, via lower interest rates.

"There is strong pressure on the Fed to keep market downturns from becoming longer-lasting bear markets," Stack says.

But that's a dangerous game, he argues. With blue-chip stock valuations again near historically high levels, the Fed is courting the same "irrational exuberance" that Chairman Alan Greenspan first raised questions about two years ago, Stack says.

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