Bear Markets: 1990

Question: Why is it called a bear market? Why is it called a bull market? A bear will attack its enemy by slashing its claws in a downward motion while a bull becomes aggressive by jerking its horns upward. Whether a market is going up or down it doesn’t become a bull or a bear until certain parameters are reached. Sometimes you don’t need to look at the numbers to know a bear is upon us. The heightened levels of fear and uncertainty that exists in today’s market alone could be enough to tip you off. But technically speaking, a bear market is one in which prices have declined at least 20% from a previous high point. Some bears take their time to make themselves present. In 2008, it took 11 months for the Dow Jones to reach a 20% decline. Other bears are quick and can be upon us in a blink of an eye. It took just one month in 2020. Some markets fall just shy of being a bear. The Dow Jones declined 19% in the fourth quarter of 2018. Suppose it did break the 20% mark in 2018; would that make any difference? Would that have been worse?

The bear market of 1990 is one of those cases that begs the question: What is a bear market? Starting in mid-July and bottoming out in the second week of October the S&P 500 declined 19.9%. (So close!) In fact, the stock market in 1990 is often omitted from historians’ lists of bear markets in US stocks. I would argue it at least deserves honorable mention. (It’s a bit like Pluto; is it a planet? Well… sort of. But technically - no.) Unlike the fourth quarter in 2018, the market in 1990 battled some very negative headlines. It also occurred during a recession which gets its extra points in case you’re keeping score at home.

1990 started off with the US military being strategically deployed. Code named “Operation Just Cause” President George H. Bush justified the invasion of Panama as necessary to protect the country and the region’s interests. A few months later one of the most recognizable names in finance, Michael Milken, plead guilty to violating U.S. securities laws. By the time the summer had arrived the Dow was at an all-time high of 2,900, but the labor market had begun to show signs of trouble. In June the unemployment rate had jumped up 5.2%.

June was a particular scary time that year. In the Lower Ohio Valley region one of the largest tornado outbreaks occurred spawning 88 confirmed twisters, 37 over a two-day period in Indiana alone. The Gulf of Mexico saw one of its largest oil spills that month, less that 12 months after the disastrous Exxon Valdez spill in Alaska.  But the event that perhaps spooked markets the most that year was the President going back on his campaign promise from 1988: “No new taxes!” President Bush reluctantly agreed to raise taxes in 1990 and one month later the economy had entered a recession.

By the end of the summer that year all eyes and ears had turned to the middle east where Iraq and Sadaam Hussein where attempting to usurp the tiny nation of Kuwait. The United Nation’s security council ordered a global trade embargo on Iraq, and during a national television address President Bush threatened Iraq, making the realization of war all but inevitable.

As the year came to a close the unemployment rate increased to 6.3%. Things had gotten particularly precarious in my home state of Rhode Island as the infamous credit union crisis began to cause bank runs. Many customers of the banks accepted discounts to get a portion of their money back quickly while others waited years before they saw 100% of their deposits. Despite the (almost) bear market in 1990 the S&P finished the year down only 3.4%.

Since World War II bear markets have lasted 14 months on average and have experienced a 35% decline. What we’ve seen is that the quicker it takes for an index to bottom the quicker the recovery is. The “bear market” of 1990 was very short lived taking just a few months to bottom out and had fully recovered within a year. If today’s bear market has already bottomed (and that is a really big if) then the trajectory could be similar to that of 1990.