If you're going to get caught in a bear market, you'll be better off in a cyclical bear market than a secular one. While in any bear market stock prices lose 20 percent or more of their value, a cyclical market lasts for months while a secular market can persist for longer than a decade. In a 2011 "USA Today" article, Dightman Capital Group's Brian Dightman suggests that investors consider the changing seasons as an illustration of cyclical and secular bear markets. If the seasons of the year are secular, he suggests, then the weather conditions in each season are the cycles.
When stocks enter a bear market, you don't have to calculate the prices of the tens of thousands of stocks that trade in the equities market to figure it out. Instead, just glance at the major stock market indexes, such as the Dow Jones Industrial Average and the S&P 500 Index, which represent trading in some of the stock market's biggest companies. When multiple indexes have lost at least one-fifth of their value from formerly achieved high prices, the stock market is considered to be in a bear market.
The average length of secular bear markets — of which there have been four — is 16 years, according to a 2011 "USA Today" article. Investors endured those secular bear markets between the start of the 20th century and 2009, according to Ned Davis Research, cited in a 2009 "Wall Street Journal" article. If stock prices were to continue lower over that entire time period, investors would be hard pressed to earn any profits. Luckily, stocks take a break from their secular bear ways and can rise more than 60 percent over an average of 18 months even within a secular bear market, the Journal article indicated.
In a cyclical bear market, stock prices and investors' moods remain low for an average of slightly more than 400 days, according to research cited in a 2011 Market Watch article. Even though a bear market is triggered once stocks decline by 20 percent, the financial losses are usually worse before it's over. In the average cyclical bear market, stock prices declined just over 30 percent, the Market Watch article reported.
In a 2009 Market Watch article, Ned Davis of Ned Davis Research identified some accompanying characteristics that let you know what kind of bear market you're in. A tell-tale sign that the market is in a secular bear market is that investors are especially pessimistic about a stock market recovery. Also, look for market valuations, which place a value on stock prices relative to corporate profits. In both cyclical and secular bear markets valuations are below the average, which is 15. In the secular bear market beginning in 1970, valuations hovered at around 10. Cyclical bear market valuations are not as low.
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