Just How Bad Has It Been?

Just How Bad Has It Been?
Current Bear Market Has Been Less Less Severe Than The Dot-Com Bust

By Mark Hulbert, Marketwatch | 24 January 2009

ANNANDALE, Va. (MarketWatch)— Just how bad has it been in the stock market? Few are even bothering to answer this question, since it appears utterly obvious to almost everyone that what the stock market has been experiencing is unprecedented, at least in modern financial history. Don't we have to go back to the Great Depression to find anything remotely similar? Well, no.

These are the surprising implications of a fascinating study published Thursday by Ned Davis Research, the Venice, Fla.-based quantitative research firm. Pat Tschosik, a senior equity analyst at the firm, took a sober and data-driven look in comparing the popping of the financial sector's bubble over the last 18 months compares to the bust of the Internet bubble in 2000-2002. In several significant ways, believe it or not, the tech experience early this decade was even more traumatic than what has transpired since mid-2007.

Since its peak in 2007, for example, the financial stocks in the S&P 500 index (SPX) have dropped 78.7%— slightly less than the 82.5% by which the information technology stocks in that index dropped in the 2000-2002 bear market. Not so fast, you might object: Surely the financials in 2007 constituted a more important sector than technology did in 2000, right? Not necessarily.

According to Tschosik, the information technology sector represented about 35% of the S&P 500 at its March 2000 peak, in contrast to the 22% weight that the financials sector represented at its peak in 2007. As a result, a greater amount of total market capitalization was destroyed by the tech sector's decline in the 2000-2002 bear market ($3.6 trillion) than by the financial sector's decline since 2007 ($2.2 trillion). To be sure, these historical comparisons provide little solace to investors who have lost huge amounts over the last 18 months. But they do provide a reality check on excessive pessimism and despair.

Just as it's dangerous at the top of a bull market to think that "this time is different"— and that the old rules no longer apply— the same is true when we're at the depths of a bear market. Just as trees don't grow to the sky, as John Maynard Keynes famously once remarked, those trees' roots won't continue descending until they get to China either. The stock market did finally recover from the Internet bust, and so will the current bear market eventually give way to a new bull market. Trite as it may sound to say this, it is a helpful antidote to doomsday thinking.