As I reached my 50 years as a professional researching stocks, and 45 years since founding Beese Fulmer.  I have had my fair share of bear markets. Stock market declines can be sorted into three categories based upon what events caused the decline.  The more protracted bear markets occurred when the Federal Reserve had to keep raising interest rates to cool off the economy and stop inflation.  We’ll call this category “Fighting Inflation”.  The next category is a “Panic” caused by something that we’ve never seen before that scares investors into selling.  The third category covers periods where asset prices lost touch with reality followed by sharp declines as these bubbles burst which we’ll call a “Mania Ending Badly.” 

The worst “Fighting Inflation” episode was a series of ups and downs that became a sixteen-year period from 1966 to 1982 where stocks essentially went sideways while inflation and interest rates were moving higher.  The inflation problems were caused by excessive government spending and easy Federal Reserve policies.  This forced our country to abandon the gold standard in 1971 which unleased a decade of accelerating inflation.  1974 saw a 48% decline in stocks as interest rates climbed to 8%.  Paul Volcker became the Fed Chairman in 1979 who took interest rates up to 15% and stocks down by 24%.   After inflation was tamed in 1982, we then began a lengthy Bull market.

The first of several “Panics” was the October 1987 one day crash of 22% caused by a new programmed trading strategy that didn’t work so well.   The next panic resulted from the 9/11/2001 attack which closed the stock market for four days. When it opened, it went down 11%, but recovered quickly as the economic impact was minimal.  The Covid panic in 2020 caused a 34% decline and this past April we had the “Liberation Day” 13% sell-off.   Panics have been relatively short-term events versus the other categories.

The “Mania Ending Badly” category is associated with more severe bear markets.  The most famous example is the Crash of 1929.  It followed a very long bull market in the roaring 1920’s.  Stocks reached a “Mania” stage as many investors were buying more and more stocks using borrowed money.   Collapsing stock prices led to bank failures and a downward spiral until 1932.  The Federal Reserve was created in 1913 to be the “lender of last resort” to address banking panics, but the organization was missing in action in the early 1930’s.  President Roosevelt made dramatic changes in 1932 to increase the money supply, which included buying mortgages from banks which re-open many banks and started to turn things around.

The 2008 Great Financial Crisis has similarities to 1929, but this time the mania was taking place in house prices and again using a lot of borrowed money.  Economist Robert Schiller called it Irrational Exuberance and a world-wide real estate bubble.  This was further fueled by government policies that mandated the banks to make loans to people with weak credit histories.  The investor class finally figured out how bad the mortgages were, and the panic began.  Unlike the 1930’s however, the Fed quickly took dramatic steps to provide liquidity and kept the banking system from collapsing.  Stocks dropped 54% in this crisis but recovered those losses over the next 3 years.  

Other Manias Ending Badly include the tech bubble of 1999-2000, with the Nasdaq technology sector down 80% but other sectors saw minimal declines.  Back in 1974 we saw a similar mania where investors crowded into the “Nifty-Fifty” stocks, like Xerox, Polaroid and IBM that were hit had in that bear market.

Every bear market feels different in the moment, but the patterns are familiar to those who study history. Whether driven by inflation, panic, or mania, each decline eventually gives way to recovery. Understanding the underlying cause can help investors avoid panic and stay focused on long-term objectives. As history has shown time and again, discipline and perspective are the investor’s greatest assets.