DOWN TIME: 1929-32
The mother of all bear markets started in 1929, lasted at least until 1932 and coincided with the onset of the Great Depression. The Standard & Poor’s 500 index fell 86 per cent.
Although many market scholars would count it as a separate incident, a further drop in equities began in 1937. The S&P endured a new fall of 54.5 per cent in the space of a year, though ending above its high from 1932. It took 25 years to get back to the 1929 peak.
The precedent is alarming: at this point in the 1929-32 bear market, stocks had another 75 per cent to fall before hitting bottom.
OILY SLIDE: 1973-76
The other era that most closely compares is the bear market that began in 1973, coinciding with the oil price spike and the beginning of the great “stagflationary” cycle of the 1970s. The S&P fell 47.8 per cent.
At its worst so far, the 2007-08 sell-off displayed a virtually identical loss of 46.9 per cent – after reaching these depths much more swiftly.
A few months ago, with fears of inflation resurfacing as oil prices surged to unprecedented levels (just as they did, for different reasons, in 1973), this was a very popular parallel. But now, with central banks cutting rates to fight fears of deflation, the comparison looks stretched.
WORST OF DAYS: 1987-90
If another example is needed, there is always the Black Monday crash of 1987. But this could be a red herring. It was the worst single day in stock market history, but the plunge came when the market had grown very frothy, at a time when the economy was reasonably strong, and there was a swift rebound.
The economic backdrop this time is far more menacing and the market has now fallen far more from top to bottom. Comparisons with 1987 are therefore wishful thinking.
FALSE BOTTOM? 2000-03
After the “internet bust” of 2000, the S&P fell 49.1 per cent. This is fresh in the mind but its lessons are questionable. It started with stocks more overvalued than ever before – and the sell-off stopped before a return to normal valuations.
But was the bottom during the WorldCom scandal of 2002 a false one? On one theory, the rebound came only because of excessive cuts in interest rates that stoked the credit bubble. That implies that this latest sell-off can end only once it has tested whether 2002 was a false bottom – meaning stocks need to fall significantly from last month’s low. If they breach that, parallels with the 1930s look all the more disquieting.
Copyright The Financial Times Limited 2008
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