The bears roamed Wall Street last week, but the last lengthy bear market in stocks unfolded so long ago that a primer about such events may be in order.
A bear market is a decline in stock prices of at least 20% from their peak. Since the Great Depression, there have been 14 bear markets of varying lengths, with declines averaging 37%.
Many Wall Street veterans think the last classic bear market occurred a generation ago, in 1973-74, when stocks dropped 48% of their value.
"I describe a bear market as a sawtooth trading pattern along a declining trend line," said economist and money manager A. Gary Shilling. "A selloff, then a disappointing rally, then another selloff, until everybody is finally sick of stocks."
After a 16-year bull market, which has pulled in many small investors through mutual funds, such a shift in psychology would require "a long series of selloffs and failed rallies, " he said.
Sung Won Sohn, chief economist at Norwest Corp., said, "I think it is just a matter of time until we get into a bear market, and that will hurt consumer spending through the negative wealth effect."
He said that in the past 70 years bear market corrections have averaged 37% and typically lasted 15 months. Applying those averages to the current market would mean a slide in the Dow Jones industrial average to the 6,000 range from its peak of 9,337.97 on July 17.
"The stock market correction this summer has taken place fairly fast," he said, "and that probably has been a bigger shock to consumers." The Dow fell 7% in August, its worst single-month performance in eight years.
With the U.S. economy already slowing, a bear market could well herald a recession, as consumers unnerved by a teetering stock market cut expeditures and weaken the important retail sector.
Nicholas S. Perna, chief economist at Fleet Financial Group, forecasts that economic growth will slow to just under a 2% annual rate. He said a market correction greater than 10% to 15% not quickly followed by a rebound "would push the U.S. into a much sharper slowdown, raising the specter of a recession during the next six to 12 months."
"Not only would consumer and business confidence drop, but the wealth effect, which has enabled consumers to increase spending faster than incomes, would become a drag," he said.
A full-scale bear market would be a new experience for many Wall Street professionals, warned Mr. Shilling, who wrote in his recent book, "Deflation," that "the average age of mutual fund managers today is 28."
The market rebounded so quickly after the 1987 crash and the so-called mini-crash of 1990, he said, that many firmly believe market selloffs "are wonderful opportunities to buy, not warnings to sell."
"Fearing something you've never experienced is difficult," which raises the likely shock value of a bear market, said Mr. Shilling, who heads his own money management and consulting firm in Springfield, N.J.
Mr. Perna said economic conditions now are far different from those of October 1987, when the Dow fell 30% Then, the economy managed to grow for nearly another three years, "because the trade deficit was shrinking dramatically," he said.
That supplied an immediate offset to the negatives that otherwise would have prevailed, he said. But now, with Asian economies in deep recessions, "the swelling trade deficit would aggravate, rather than offset, a stock market drop."
