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America’s Longest Bear Market

We know that the worst bear market in United States history occurred between 1929 and 1932 when the S&P Composite fell 86%, returning the stock market back to levels it hadn’t seen since the 1800s.  But what is the longest bear market and how long did it last? 
 
To answer this question, you have to understand GFD’s definition of a bear market as a 20% decline in the stock market and a bull market as a 50% increase in the stock market.  If the stock market falls by 30%, rises by 40%, then falls by another 30%, that would be treated as a single bear market.  So you could rephrase the question as what is the longest period of time in which the stock market failed to rise by at least 50%?

Now that Global Financial Data has calculated its US-100 index that stretches from 1792 until 2019, we can answer that question.  The answer is 51 years going from the establishment of the stock market in Philadelphia in 1792 when the Bank of the United States (BUS) came into existence until the 1843 market bottom after the Panic of 1837.  During that period of time, the stock market lost over two-thirds of its value.  The only bear market with a larger decline was the bear market of the Great Depression mentioned above. 

Banks, Insurance Companies and the 51-Year Bear Market

You have to remember that during the first half of the 1800s, most of the stocks that traded in the United States were bank and insurance companies and most of the return to stocks came in the form of dividends.  Between 1792 and 1843, stocks on average lost 1% per annum which compounded to a 66% loss over the 51-year period as is illustrated in Figure 1.  However, if the dividends stocks paid had been reinvested, the return would have been positive with $100 growing to $690, not declining to $33. This provided a gross return of 3.86% per annum, not a loss of 1% per annum.

It should also be remembered that two stocks, the First and Second Banks of the United States were by far the largest companies in the United States during those 50 years.  The Bank of the United States represented over 80% of the stock market capitalization in 1792 and at least 20% of the total stock market capitalization until 1843.  The First Bank of the United States rose to $600 after shares were issued, then slowly declined in value to its $400 par by 1815. Similarly, the Second Bank of the United States jumped in price to $150 when shares were first issued, then traded between $100 and $125 until President Andrew Jackson failed to renew its charter in 1836. The bank went private, but failed and the stock collapsed in price along with the rest of the stock market after the Panic of 1837.

Until the advent of railroads in the 1830s, the stock market was made up almost exclusively of state-chartered bank and insurance companies.  Most of the banks had a single office in Boston, New York, or Philadelphia with little hope of growth.  If the bank or insurance company made a profit, it was paid out in dividends to shareholders, not reinvested for expansion. During a panic, as in 1819 or 1837, some banks went bankrupt, driving the index down.  

Between 1792 and 1843, there were two Panics that hit the United States in 1819 and in 1837, both of which drove the market down.  After the United States failed to recharter the First BUS, the United States encouraged banks to lend money during the War of 1812.  After the Second Bank of the United States was chartered in 1816, it began lending money freely, but in the summer of 1818, the Bank initiated a sharp credit contraction.  The BUS began rejecting state-chartered banknotes in August 1818 and in October 1818, the US Treasury demanded a transfer of $2 million from the BUS to redeem bonds on the Louisiana Purchase.  The price of cotton fell 25% in one day in January 1819 and the Panic was on. Between June 1818 and June 1819, the US-100 index fell by 25%.

Stocks recovered modestly in the 1820s and 1830s, moving back to the level they had been at in 1818. But the economy grew too quickly. States such as Mississippi issued bonds in London, and cotton exports began rising, bringing silver into the United States promoting economic growth. Meanwhile, the United States expanded westward into new territories and states leading to land speculation and higher prices.  The Bank of England decided to raise interest rates in 1836 to increase its monetary reserves, and New York banks followed suite in early 1837.  The price of cotton fell by 25% in February and March of 1837.  The Specie Circular was issued in 1836 requiring all land purchases to be paid for in specie, not in banknotes, putting a brake on rising real estate prices.  The Deposit and Distribution Act of 1836 put federal funds in western banks, reducing deposits in money center banks in New York and Philadelphia.   When Martin Van Buren became President in March 1837, he refused to provide emergency relief or increase federal spending to slow the downturn leading to a general decline in the American economy that persisted until 1843. 

In the 1830s, Americans began building the railroads that would eventually crisscross the nation.  The Baltimore and Ohio was founded in 1828 and other railroads began popping in New England and along the Atlantic seaboard. The railroads pulled the American economy out of its recession, and the United States enjoyed growth until the Panic of 1857 led to the next recession. 

The Longest and Mildest Bear Market?

The first bear market in the United States was as much a factor of the nature of the stock market as anything else.  Two Panics in 1819 and 1837 drove the stock market down, but until the railroads came along, there were few growth opportunities that could push the market up into a bull market.   Small banks and insurance companies that had little prospect for growth dominated the American economy.  Profitable banks simply paid out dividends to shareholders while unprofitable banks collapsed.  The result was an overall decline in the price of banks of about 1% per annum, but with banks paying dividends that averaged 5%, investors still received a 4% total return on average. While the recovery from the Panics of 1819 and 1837 were mild, the recovery from the Panics of 1857, 1873 and 1893 were sharp as Figure 1 illustrates.

After 1840, manufacturing companies grew up around Boston and railroads were built to connect American cities to each other.  At that point, the regular pattern of alternating bull and bear markets began and continues to this day.  By our count, there were four bear markets in the 1800s, twelve in the 1900s and two, so far in the 2000s.  How many more bear markets will occur before the century ends we do not know, but we can guarantee you that no 50-year bear market is likely to ever occur in the United States again.

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