Bear market marks a year of rampage

NEW YORK -- The bear market that is wiping out investor wealth at an alarming rate turns 1 year old today. But nobody on Wall Street is celebrating.

What was considered an "average" or "garden variety" or "cub" bear a few weeks back, has spun dangerously out of control. In the current six-session losing streak, including Wednesday's 189-point plunge, the Dow Jones industrial average has plunged almost 1,600 points, or nearly 15% — wiping out more than five years of gains.

There is nothing average about this bear market.

The 37.1% drop suffered by the Standard & Poor's 500 index since hitting an all-time high of 1565.15 on Oct. 9, 2007, dwarfs the 31.5% average loss in the 10 bear markets in the post-World War II era, S&P says.

Investors are rattled because the financial crisis caused by the mortgage meltdown is deepening. Panic is spreading. Emotions are high. People's 401(k) balances are shrinking. There is a sense that stocks will never stop going down. Investors who haven't already fled the stock market, are asking, "Is it too late to get out?"

Those fears are not totally irrational. Gloomy headlines about an impending global recession, frozen credit markets, rising joblessness, weak retail sales and plunging asset prices are real.

To complicate matters, steps taken by governments around the world, such as hundred-billion-dollar rescue packages and Wednesday's synchronized interest rate cuts by major central banks, have yet to stop the bleeding or spur a recovery.

But in turbulent times such as these, perspective is needed to help investors make sound money decisions.

"It is useful to look back at the historical record to observe the duration and depth of earlier market pullbacks to set some baseline expectations for the present sell-off," Steven Foresti, head of investment research at Wilshire Consulting, noted in a report titled "2008 Stock Market Sell-off: Steeper than the Average Bear?"

How does this bear stack up against other megabears? How low is low? How long will it take to recoup losses?

Says Robert Froehlich, chief investment strategist at DWS Investments: "Everywhere I go, I get the same questions, 'When will it be over?' And, 'When will the turnaround begin?' "

While no two bear markets are alike, history can provide investors something of a road map of what might lie ahead.

Right now, the stock market is limping through its third-worst bear market since the mid-1940s. Stocks have already suffered more pain than they did in the 1987 bear market, which included a record 22.6% one-day Dow crash.

The current downturn has wiped out $7.4 trillion in stock market value, according to the DJ Wilshire 5000 "wealth meter."

How bad can it get?

The worst bear market of all time was the one following the stock market crash of 1929. It lasted almost three years and took stocks down 83.4%, according to Wilshire Compass. This grizzly bear followed a giddy time for investors in the Roaring Twenties, a period of great prosperity in which speculation in stocks — often with borrowed money — got out of hand and ended badly.

Right now, the current bear is closing in on the nearly 50% drops suffered in the dot-com crash-driven 2000-02 bust and the 1973-74 rout, which was sparked by double-digit inflation, the Arab oil embargo and a lengthy recession.

After highflying tech stocks came crashing down after years of a buy-at-any-price mentality in the late 1990s, the S&P 500 bottomed out with a loss of 49.1% in October 2002, according to S&P. The mid-'70s multiyear decline knocked stocks down 48.2%.

"Bear markets," says Woody Dorsey of Market Semiotics, "take plenty of time and plenty of prisoners."

How long will the bear live?

The average bear market lasts roughly 16 months, S&P data show, so by historical standards, the current downturn is three-quarters done. But there have been much longer bears, including one that ended in 1942 after more than five years of downward price action.

Two of the most severe multiyear bear markets in history, namely the dot-com bust earlier this decade and the 1929-32 wipeout, were finished in 31 and 33 months, respectively.

On a more optimistic note, since 1940, nearly half the bear markets have ended in 12 months or less, notes James Stack of InvesTech Research. The 1987 bear was a three-month affair, so it's not totally unreasonable to anticipate a possible market bottom before the end of the year if government officials can stabilize the markets.

But for that to happen, "Investors need a foothold to get an initial sense of confidence and stability," says Stack.

How long to recoup losses?

The good news is that stocks stop going down at some point. The not-so-good news is that it takes a good deal of time, sometimes years, for investors to make back all the money they lost.

Excluding the 25 years it took to get back to even after the 1929 crash, for example, it takes three years and three months, on average, for investors to recover their losses, InvesTech says.

"The time required to recover wealth following a bear market decline is often considerably longer than the sell-off itself," notes Wilshire's Foresti. But time is still a great healer for stock investors.

To back up that point, Foresti provides some eye-opening research into how investors have fared after investing in stocks at the worst time possible: at the absolute peak of a bull market.

On average, investors posted annualized losses of 0.6% five years after the peak. However, over a 10-year buy-and-hold horizon, they enjoyed average annual gains of 6.6%. In all but one 10-year period, stocks were higher.

"These results," Foresti says, "demonstrate the benefit of having a long-term perspective when investing in risky assets."

While the data demonstrate the resiliency of the stock market, they also suggest that investors might need to be more patient if they are to stay fully invested and earn back their losses.

"The virtue we need today is patience," says Marty Kurtz, a financial planner based in Moline, Ill. "Investors either believe in the capital markets or not. Just two or three weeks ago, no one even anticipated that this (market meltdown) would happen."

In a research report titled "Unhappy Anniversary," Jeffrey Kleintop, chief market strategist at LPL Financial, notes that stocks are not likely to mount a sustainable rally until after the government's $700 billion bank rescue plan is implemented and signs of success are evident.

The main goal of the plan is to buy up bad mortgage debts from troubled banks to clean up their balance sheets and get them lending again.

In a Wednesday news conference, Treasury Secretary Henry Paulson said the first purchase of toxic assets is a few weeks off. He asked the market for patience.

But on a brighter note, Kleintop's research shows that in the past, stocks have tended to turn up halfway through a recession.

While an official recession has not been declared, Kleintop says growth is likely to decline in the third and fourth quarters of this year, and perhaps in the first quarter of 2009. If he's right, his guess is we are near the halfway point of a recession.

"That's the point at which these previous markets have typically rebounded," he says.

Froehlich, who calls himself a glass-half-full kind of guy, says the combination of "extreme pessimism, unprecedented policy responses around the world, lots of money on the sidelines, lower gas prices and more attractively priced assets" are bullish signs that point to opportunities for long-term investors.

And history shows that investors who get in at market bottoms profit handsomely. The Wilshire study shows that people who bought at the bottom of bear markets dating back to 1929 reaped average annual gains of 17.7% in the five years after the trough.

The catch, of course, is that no one knows when the market will stop going down — or where the bottom really is.