Explaining a bear market

Growling at the bulls of the stock markets

Both London's FTSE 100 index of leading shares and the Dow Jones Industrial Average in the US have sunk into bear market territory this week.

The "bears," stock traders who believe that stocks are going to fall, now far outnumber the "bulls," who believe markets are going up.

On Wednesday, as markets plunged around the world, about £64bn was wiped off the value of shares on the London Stock Exchange, which closed down 225.9 points at 5,314.

Definition of a bear market: when it hurts to look at the stock tables in the newspapers in the morning

Charles Jones, Columbia University

This was more than 25% lower than its peak on 31 December 1999, official bear market territory.

By some reckoning, a bear market happens when shares fall by 20%.

On Thursday, it was the turn of Wall Street: the Dow briefly sank into its first bear market in more than ten years before bouncing back out by the close.

For much of the day, it was below 9,378, the level that constitutes a bear market.

The index's record closing high was 11,722.98 on 14 January 2000.

The US high-tech index, the Nasdaq, is still deep inside the bear's lair, down 62% from its record high of 5,048.62 on 10 March 2000 - after a huge bull run which saw the average triple in just three years.

So what is a bear market?

The terms 'bear' and 'bull' are said to have been used in the securities world since the early 18th century, when stock trading became popular in London.

All in a days work - traders on Wall Street facing big losses

In reality, experts have many, differing views on what constitutes a bear market.

"When it hurts to look at the stock tables in the newspapers in the morning," is how one professor in the States describes it.

Some prefer a more considered definition, calling it a persistent and sustained decline in markets over a number of months.

Traders have the expectation that markets will continue to go down, they ditch their shares and that compounds the problem.

The flip side of the coin - the bull market - is when a market sees a long term, persistent uptrend, lasting anything from a few months to years.

Many analysts believe that markets suffer from "herd mentality" - it it hard not to trade in the same direction as all traders believe the market is going, and it therefore becomes a self-fulfilling prophecy.

The Dow Jones Industrial Average has experienced around 20 bear markets, averaging a duration of one and a half years from top to bottom, says James Stack, president of InvesTech Research, a US-based market tracking firm.

The recovery from the lowest point to above a previous peak took two and a half years on average, he says.

Infamous bear markets

But going back further in history, the father of all bear markets is generally agreed to be the Wall Street crash in October 1929, which was followed by the Great Depression.

Thousands of investors lost their savings in the Wall Street crash of 1929

Thousands of investors lost their savings in the worst stock market crash in Wall Street history, after a five-day frenzy of heavy trading.

At its worst level, the Dow dropped 89% from its high of 386 in September 1929 to 41.22 points in July 1932.

It took the index more than two decades to fully recover.

Going forward several decades, the bear market of 1973-74 hit both the UK and the US with a double whammy, although it was worse in the UK than anywhere else.

The world economy was in turmoil.

There was stagflation - high inflation, with fears that it would spiral out-of-control, linked with recession.

There was a currency crisis as countries abandoned fixed exchange rates. The price of oil had also risen sharply because of the Arab oil embargo.

And in the UK, fears of further industrial unrest under the new Labour government compounded the situation.

This might be compared, some believe, to the current situation, where prices again have been rising because of production cutbacks by OPEC, the Organization of Petroleum Exporting Countries.

1987 crash

Another infamous bear market in the States was that which occurred in 1987, when the stock market crashed amid soaring interest rates and rising inflation.

In just a matter of weeks, the Dow dropped like a stone, falling 36% from a peak of 2,722 points in late August to a low of 1,738 in mid October.

The Wall Street Journal at the time heralded the percentage decline as "greater than in 1929".

But it took the Dow less than two years to recover.

Will the bears be on the run soon?

So gazing into the crystal ball, when can world markets expect to haul themselves out of the current crisis?

Most experts in the US do not expect the market to recover until there are signs that the economic slowdown has turned a corner.

"If the (economic) downturn is short and sweet, then this will be a bottom or close to it," said Charles Jones, a professor of finance at Columbia University in New York.

"If it stays nasty, we're still looking over the cliff," he added.

It is commonly said that when America sneezes Europe catches a cold, so until the US economy strengthens, it seems unlikely that other major world stockmarkets will recover.