Commentary: The current bear market -- how bad is it?

Just how bad is the bear market in the US and world market? It is already about 27 months long and it seems like it's been going on forever. It seems really long and horrible. Is this normal for a bear market?

Funny thing about bear markets (assuming there is anything funny about them), is that no one can really agree on how to define them.

The generally accepted rule-of-thumb is that we're in a bear market when a major index such as the Dow or the Standard & Poor's 500 index dips 20 per cent or more below a previous peak. But that leaves lots of room for ambiguity. What if stocks crash 20 per cent but bounce right back?

And what if declines don't break 20 per cent, but a general market malaise goes on and on? (The 17-month 19.4 per cent decline in the S&P 500 that began in September 1976, for example.)

Even if we all decide we are in a bear market -- and I think we can all agree the international markets are in one now -- the question then arises, when can we say we've entered a new bull market?

Some people believe that just as a 20 per cent decline marks a bear, then a 20 per cent rise from a bottom marks the beginning of the new bull. But that would mean that we entered a bull market in January 2002, with the S&P 21.4 per cent higher than its low-point in September 2001. But who really believes that?

We think you've got to assume we're still in a bear until we see a sustained 20 per cent or better gain from the bear market low.

Given these uncertainties, what is the longest generally agreed on bear market in history? Let's limit the discussion to US history and to modern history. (Stock prices declined four consecutive years from 1873 through 1876, but aside from a few history buffs, we doubt many people are interested in what the market was doing during those times).

Given those parameters, the longest bear seems to have occurred from November 1938 to April 1942, a duration of 41 months. But, once again, we get back to this matter of what constitutes the transition from a bear to a new bull and whether you can have one or more bulls within a long-term bear.

For example, the second longest bear stretched from September, 1929 through June, 1932, a period of 33 months. But that bear was followed by another 20-month bear that lasted from July, 1933 through March, 1935. Were these two separate bears or one bear interrupted by an aborted comeback?

In any case, however you want to measure bears, it appears this one is already a rather long one, even if you want to claim it ended last January. It also ranks fairly high in terms of severity compared with recent bears with the S&P 500 dropping 36.8 per cent from its March 2000 peak to its (so far, at least) September, 2001 low.

Granted, that's well below the 1973-74 bear's 48.2 per cent drop and doesn't come anywhere close to the 1929-1932 bear's 86.7 per cent decline. Even Nasdaq didn't get whacked that hard. But this bear has put in a respectable showing by virtually any standard. So now that it's established itself in history, let's hope it ends already so we can begin the process of rebuilding our portfolios.

- FundSource