Previously, I discussed reasons our economy would go through a major downturn. My study of major bear markets indicates that after a market top and drop, such as the one we have experienced since January 26, there is a second top coming within -2.6% and +2.9% of the first. This marks the beginning of a major bear market. Having arrived at the traditional topping range, what can we reasonably expect moving forward?
What follows is a summary of market behavior for every major bear market since 1929 that, like ours, was preceded by a correction. There are six of them starting in 1929, 1937, 1946, 1969, 2000, and 2007. S&P 500 data is used for the 1968, 2000, and 2007 bear markets. Dow Jones closing data was used for all bear markets before that.
The largest drops for this market were (trading days from the peak given in parentheses) 13.5%(12), 11.7%(13), 9.9%(17), 6.8%(20), and 6.3%(9). The 30-day average change was -1.07%. By trading day 10 the % loss was 15.1%. By day 30 it was 31.0%.
The largest drops for this market were 5.0%(18), 4.5%(15), 4.3%(28), 4.1%(24), and 3.1%(20). The 30-day average change was -0.68%. By trading day 10 the % loss was 6.0%. By day 30 it was 19.1%.
The largest drops for this market were 2.5%(15), 1.2%(13), 1.0%(30), 0.95%(14), and 0.77%(8). The 30-day average change was -0.13%. By trading day 10 the % loss was 0.9%. By day 30 it was 3.9%.
The largest drops for this market were 1.4%(19), 0.92%(3), 0.90%(17), 0.89%(4), and 0.77%(18). The 30-day average change was -0.29%. By trading day 10 the % loss was 2.7%. By day 30 it was 8.4%.
The largest drops for this market were 2.6%(28), 1.9%(24), 1.6%(27), 1.5%(19), and 1.4%(10). The 30-day average change was -0.33%. By trading day 10 the % loss was 5.0%. By day 30 it was 9.6%.
The largest drops for this market were 2.9%(10), 2.6%(15), 2.5%(6), 1.8%(27), and 1.6%(29). The 30-day average change was -0.24%. By trading day 10 the % loss was 2.6%. By day 30 it was 7.3%.
All the bear markets declined gradually for the first week. In fact, it was rare to find a substantial drop during that first week. Except for 1969, none of the largest percentage drops took place during the first week and those were only 0.92% and 0.89%. Markets did begin to diverge during the second week with the 1929, 1937, and 2000 markets dropping 15.1%, 6.0%, and 5.0%, respectively, after 10 trading days.
Once the top was reached, there was no turning back. Instead, most markets had a steady decline. The only exception was the exceedingly volatile 1929 market, which declined 35% by the 13th day recovered 19% and subsequently resumed its decline. This is an important point for our market since the S&P 500 had an intraday high of 2801.90 March 13. This placed it within 2.5% of the January 26, 2018 high, just within the window for the second peak topping range. That would have placed that potential second peak historically early for a major bear market with a correction preamble. The fact 24 trading days later we are still waffling back and forth and in a recent uptrend is in stark contrast to previous major bear market profiles and argues against that being the second peak.
Note that, except for the 1929 market, which by that time was recovering, none of the markets had reached bear territory 30 trading days after the market peak. Technically, the 1937 market had dipped into bear territory days before it but was only sitting 19.1% below the peak by day 30. All the other markets were only approaching correction level territory.
Given that summary, it is likely that we will also experience a gradual decline with little damage the first week. In fact, with large loss days paling in comparison to those we saw in early January, it may well lull investors into a sense of complacency. Having gone through a long correction already, there will likely be little concern a month and a half later if the 30th trading day arrives with losses still in the single digits. That would be a mistake as the bear relentlessly creeps up on us.