A Look At Recessions and The Impact on The Market

James Stack of InvesTech Research looks at past bear markets and recessions going back more than 82 years. The details of his findings?

• Generational bear markets, with losses exceeding 40% are the exception, not the norm. Since 1940, only one in four bear markets reached such a loss.
• The 2000-02 bear market was so severe because of record overvaluation extremes at the start, and the washout of the high-tech bubble with a -78% loss in the Nasdaq (of which many of the largest stocks were also components of the S&P 500).
• Unweighted indexes declined only ~25% in the 2000-02 bear market;
• The 2007-09 bear market was extreme because the collapse suddenly exposed all of themortgage derivatives on the balance sheets of major banks. The extent of this exposure was not well known — even to CEOs of the banks.
• Bear markets without recessions are more of a rarity. Since 1940, when they have occurred, the declines are usually milder. The 1987 Crash, with a loss of -34% was the exception; but ’87 was triggered in a monetary climate where interest rates were soaring and the U.S. dollar was tumbling.
• Average valuation, as measured by the P/E ratio of the S&P 500 Index, at the start of all the bear markets exceeding 30% was 21.8. Today, the P/E ratio of the S&P equals 14.7.

One thought on this: The fear of another giant bear market — of another 50% loss — is likely due to the recency effect and the aftermath of 2007-09 as much anything else.

http://www.ritholtz.com/blog/2011/10/a-historical-perspective-of-recessions-and-bear-markets/