Andrew Page
Andrew Page

Another week, another major drop in the share market. It seems that as soon as it starts to look as though the market may have bottomed, more bad news acts to send shares further into the red.

No doubt all the bad news will get plenty of media coverage this week, and unfortunately a fair portion will be sensationalized nonsense. Phrases such as “financial Armageddon” and “financial Pearl Harbor” have been doing the rounds, and while I don’t want to down play the seriousness of the global financial difficulties, I do want to remind readers that the market has experienced and survived worse in the past. As such, let’s look back in time to previous “market meltdowns” and see what lessons we can learn.

As I’ve pointed out before, bear markets are in no way anomalous and in fact occur with a surprising degree of regularity. As you can see in Table 1, the Australian market has experienced 10 bear markets since the mid 60’s, so on average we tend to see a bear market every 4 to 5 years.

Table 1. Bear Markets since 1964

Start Date Length (months) Decline
February 1964 16 20%
December 1969 23 35%
January 1973 20 58%
November 1980 16 37%
September 1987 5 44%
August 1989 16 27%
November 1991 12 21%
February 1994 12 22%
March 2002 12 22%
November 2007 11 32%
Average Length
14.3 months
Average Decline

Notes: Start date is the high of the market prior to the correction. Bear Market defined as a 20% decline in All Ordinaries index. Length is the time taken to reach the bottom of the market. Decline is percentage drop from high to low.

What’s also interesting about this history is that it tells us that bear markets don’t tend to last that long. Indeed the average length is a little over 14 months, and the average correction is approximately 32%. The current pull back is entering its 12th month, and we are currently down around 32% from last year’s highs and although that doesn’t guarantee we won’t go any lower it does give us hope that we are nearer the end than the beginning.

The worst bear market in the past 40 odd years was the oil shock of the 1970’s, where the market dropped 58% over 20 months. And while that was no picnic, the important thing to note is that (just like every other bear market) it came to an end and was followed by a strong bull run. Indeed, the best gains are made after a big pull back. After the correction of 73, the market proceeded to gain 324% in a bull market that lasted over 6 years!

This was in no way a one off event. If you look at bull markets over the same period (Table 2) there are a couple of important observations. Firstly, every correction has been followed by a solid bull market that has gone on to carve out new all time highs. As a matter of fact, the average advance is in excess of 140%. The second observation is that bull markets tend to last a lot longer than bear markets, in fact they are on average around three times as long.

Table 2. Bull Markets since 1964

Start Date Length (months) Advance
June 1965 54 116%
November 1971 14 44%
September 1974 74 324%
March 1982 66 387%
February 1988 18 41%
January 1991 11 41%
November 1992 15 69%
February 1995 85 88%
March 2003 56 156%
Average Length
43.7 months
Average Advance

Notes: Start date is the low of the market following the correction. Bull Market defined as a 20% advance for All Ordinaries index. Length is the time taken to reach the top of the market before a new bear market starts. Advance is percentage gain from low to high.

What we also need to keep in mind is that some of the best gains were in the 6 months after the end of the bear market. Investors who sell out near the bottom miss out on these gains and will generally have to wait much longer for their capital to recover.

Figure 1. All Ordinaries performance since 1960. Bear markets are highlighted in red.

click chart for more detail
click to enlarge


So let’s go back to the future and apply these lessons to our current situation. We don’t know exactly when the market will turn, but most experts are saying that the current crisis should be over within the next year. In any case, what is important is that we know that the market will most likely experience a solid and long lasting bull run as confidence returns and people rush to buy into heavily discounted stocks.

There is no doubt that it is tough out there at the moment, but the best thing you can do is to hang on. As they say, time heals all wounds, and this is most certainly true for the share market. The economist and mutual fund pioneer Sir John Templeton once said:

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

Considering there is plenty of pessimism at present, investors would do well to remember these words of wisdom.

Make the markets work for you

Andrew Page