Earlier this month (July 8th to be exact) the Dow Jones Industrial Average passed its 81st anniversary of its closing low during the Great Depression. On July 8, 1932 the average closed at 41.22 (that is right, 41.22…I didn’t leave a digit out) which marked the end of an -89.19% decline from its prior peak set on September 3, 1929. Over 81 years later, with many other bear and bull markets in-between, the index is currently at or around a record high level of over 15,500.
Though it is hard to imagine what it was like to be an investor in such a significant downturn, chances are you lived through history’s second worst peak to trough decline. From October 9, 2007 to March 9, 2009 the DJIA index fell -53.78%, which was the worst peak to trough decline since that period over 80 years ago.
Many people, after having experienced this significant decline in recent memory, are acutely worried about when the next bear market will come. A bear market represents a 20% decline from the market’s prior peak level, and a correction represents a greater than 10% decline but less than 20% (which would turn the correction into a bear market). The news media will try to forecast which data point will trigger the next decline — whether it is monetary tightening by the Federal Reserve, slowing economic growth in China, or any number of reasons.
History, as told by the Dow Jones Industrial Average and documented by Crandall, Pierce & Company, suggests that since 1900 there have been 38 corrections and 21 bear markets. That averages out to about a bear market or a correction every 1.9 years. So, will another bear market or correction occur in the future? Our answer is yes, certainly. When will it happen? We don’t know that answer, and we don’t feel that there is a good source to indicate the exact timing of when the next downturn will occur.
So, we encourage clients to pick an asset allocation that fits their situation and one that can sustain them through the next downturn. That way they can remain invested to participate in the following recovery – which has happened 59 times out of the last 59 corrections or bear markets.
Travis Boyer, CFA