When were the most prolific bull and bear market periods in the
United States? Which stock market indictors may be used to measure market
performance? What causes bull and bear markets?
That's a lot of questions on a complex subject; timely, too! Here goes...
The Dow Jones Industrial Average Has a History
The Dow Jones Industrial Average (DJIA, or Dow) provides a much longer
historical comparison than some newer stock market indexes. The Dow, published
by Dow Jones, Inc., soared in the 1990s along with most other stock market
measures. Still, using annual data going back to 1901, the expansion of
the Dow in the 1990s was extraordinary, as Chart A shows.
CHART A -- The Dow
There are a number of different firm-level stock indicators; two that
are frequently followed are the earnings per share and the price-earnings
ratio. In addition,
there are many stock market indexes that one can use to monitor or evaluate
the performance of the overall market or a sector of the market. While
all the market indexes are influenced by present and expected macroeconomic
conditions, including interest rates, corporate earnings, business cycles,
and inflation, the different indexes may exhibit strikingly different
A narrowly focused index, the Dow tracks the economic health and earnings
outlook for the stocks of 30 blue chip industrial companies (there are
separate indexes for transportation firms and utilities). In contrast,
the Standard and Poor's 500 Common Stock index (S&P 500) is a broader
measure, a weighted index of the stock prices of 500 large U.S. firms,
and its performance reflects conditions across a broad mix of industries.
The NASDAQ composite index is dominated by high-tech firms, and its performance
reflects economic conditions and the outlook for the high-tech sector.
The Market as a Leading Economic Indicator
The S&P 500 is classified as a leading economic indicator by The
Conference Board and is used in their calculation of the composite leading
economic indicator series.
This designation recognizes that the S&P 500, typically rises
(falls) several months before the overall economy begins to expand (contract).
This is a tendency, not a rule; the economy continued to expand
following the 1987 stock market crash.
Biggest Bull Markets
The 1990s' bull market compares favorably when examined one-on-one against
other strong expansions in the Dow. Chart B plots the cumulative percentage
increase in the Dow from its previous trough for four noteworthy expansions.
This comparison shows that the 1990s' expansion (even including the decline
in 2000) recorded a larger increase and rose for a longer period than
occurred during the other three major expansions.
CHART B - Bull Markets
Worst Bear Markets
What goes up, sometimes comes back down, which brings us to the subject
of bear markets. A bear market is usually defined as a decline of 15 to
20 percent or more over a period of several months or longer. Chart C
provides a comparison of several periods with large stock market declines;
it plots the cumulative percentage decline in the Dow from its previous
peak, showing that the downturn from 1928 to a trough in 1932 was by far
the most severe. The Dow fell about 80 percent over this period, which
coincides roughly with a sharp decline in gross domestic product that
occurred in the early years of the Great Depression. Moreover the Dow
fell for four consecutive years, more than twice the length of the next
longest declines (1972 to 1974 and 1912 to 1914).
CHART C - Bear Markets
Like Stocks, Indexes also Differ
Chart D plots monthly levels of the Dow, the S&P 500, and the NASDAQ,
showing their varied performance over the 12 months ending in March 2001.
This variation in performance mainly reflects differences in the stocks
included in each index. From its monthly peak in January 2000 to March
2001, the Dow (which tracks 30 blue chip industrial companies) fell by
more than 10 percent.
The broader S&P 500 fell by more than 20 percent from its August 2000
peak until March 2001. (This index is more likely to closely reflect overall
stock market performance because it monitors the performance of a large
group of firms from many industries.)
While both the Dow and the S&P 500 include some high-tech stocks,
the NASDAQ is dominated by these stocks and, therefore, more closely reflects
conditions in the high-tech sector. During the rapid expansion of technology
firms late in the 1990s, the NASDAQ soared. However, by late 2000, the
dot-com expansion came to a jarring halt and the high-tech manufacturing
sector began to experience a slowdown in sales, revenues, and profits.
As a consequence, the tech-heavy NASDAQ fell much more sharply than the
other two indexes, declining by nearly 59 percent from March 2000 to March
CHART D -- Performance Varies
What Causes Bull and Bear Markets?
If I only knew! Let's take a quick look at the NASDAQ. A thought-provoking
article by Simon Kwan (2000) examined the tremendous run-up of tech stocks'
market value from 1995 to the spring of 2000. He compared high-tech stocks'
share of overall market valuation to the sectors' share of other key economic
measures: assets, employment, and sales. Kwan found that after the run-up,
"Technology companies dominate in terms of market capitalization,
but not in terms of tangible assets, employment, and sales." http://www.frbsf.org/econrsrch/wklyltr/2000/el2000-15.html
Finally, a parting thought on the prospect of bull markets going bust.
Samuelson and Nordhaus (1998) quote Burton Malkiel's work on the subject
of market "bubbles, panics, and the madness of crowds," to provide
their readers with perspective on stock market bubbles and crashes. Malkiel
(1994) noted, "Greed run amok has been an essential feature of every
spectacular boom in history."
Fabozzi, Frank J., Franco Modigliani, and Michael G. Ferri. (1994) Foundations
of Financial Markets and Institutions. Prentice Hall Inc., Englewood
Cliffs, New Jersey, Chapter 18.
Kwan, Simon. "Three Questions about 'New Economy' Stocks."
FRBSF Economic Letter, Federal Reserve Bank of San Francisco, 2000-15;
May 12, 2000. http://www.frbsf.org/econrsrch/wklyltr/2000/el2000-15.html
Malkiel, Burton. (1994) A Random Walk Down Wall Street. Norton,
New York, 6th edition.
Samuelson, Paul A., and William D. Nordhaus. (1998) Economics.
Boston, Irwin/McGraw-Hill Inc., pages 482-489.
The Conference Board. (May 3, 2001) http://www.globalindicators.org/methodology/6month_example.cfm
Kwan, Simon. "The Stock Market: What a Difference a Year Makes."
FRBSF Economic Letter, Federal Reserve Bank of San Francisco, 2000-17;
June 1, 2001. http://www.frbsf.org/publications/economics/letter/2001/el2001-17.html