Dennis F. Palumbo, CPA, PA

ears have played an important part in the history of this country. Daniel Boone chased them down. Davy Crockett is reputed to have killed one when “he was only three.” California is known as the Golden Bear State. And gold miners, for diversion, would pit a bull against a grizzly in a blood sport to see which would survive.

As a teenager, I spent a summer in Alaska in bear country, armed with a .44 magnum and poor judgment for protection. I also spent considerable time hiking in the Colorado Rockies in some of the same country written about in “Ghost Grizzlies: Does the Great Bear Still Haunt Colorado?”, by naturalists David Peterson and Doug Peterson.

Somehow I managed to survive, as will today’s investors who are wailing and gnashing their teeth over this bear market. Like the four-legged kind, a market bear is simply a part of nature. While advances in market controls, technology, and a better understanding of how fiscal and monetary policy can control market risks, the fact remains that bear markets are not extinct, nor on the endangered list. We just need to learn to live with them.

To survive amongst bears, it helps to know a little about them. A bear market is considered to be a market that drops 20% from its high. The S&P 500^Ò reached 1,565 on October 9, 2007, and reached a low of 1,239 on July 11, 2008, a 21% drop. Most bear markets since the Great Depression have been provoked by a policy of monetary restraint by the Federal Reserve, loss of market liquidity, and outbreaks of war.

The recession/bear markets of 1981–83, as well as 2000–01, were in large part caused by Fed actions raising interest rates. Lack of liquidity was the factor in 1987 when stocks became grossly overvalued. The first Gulf War in 1990–91 produced a war-driven bear market. When history writes the epitaph for this bear market, it is likely to point fingers at the subprime mess, exacerbated by rising commodity prices which have eroded consumer confidence and negatively impacted consumer spending.

Bear markets last from peak to trough followed by expansions from trough to peaks. Fortunately, contractions are becoming shorter, while expansions are becoming longer, with each expansion reaching a new high. A long term chart of the S&P 500 index of stocks shows a line going up and to the right, despite the drops along the way.

Data compiled from Bespoke Investment Group for a recent Barron’s^Ò article noted that bear markets have averaged 386 days from peak to trough since 1940. By the time the market had dropped 20%, about 74% of the drop was out of the market.

There are usually few safe havens in a bear market. Even the lowly CD is not “safe” if consistency of return is used to measure safety. Changing interest rates generate reinvestment risk, as well as tie money up with a surrender charge, and negate the investor ability to buy back into the market on a timely basis. Those who continue to own dividend paying stocks, despite their falling prices, are rewarded with dividend “rents” as they await the expansion phase.

During the later stages of a bear market, investors tend to be dragged down by despair, leading to an indiscriminate jettisoning of good assets. While we would all like to think we know precisely the time to sell and buy, those times are emotionally counterintuitive. The fact remains that in order to grow real wealth; one has to stay in the game, and continue to own the great companies of this land.