History suggests investors face extended bear market blues

Wed Jan 27, 2016 11:36am EST
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By Jamie McGeever

LONDON (Reuters) - Good news for investors rattled by the "bear market" in many stock indices is that the selling may only last a few months --the bad news is that another big lurch lower is likely and that previous peaks will not be revisited for years.

Worries over China, collapsing oil prices and rising U.S. interest rates have pushed many European stock markets down more than 20 percent from highs hit last year, signifying losses of trillions of dollars for investors.

The slide has brought the term "bear market" back into public consciousness -- Google searches for it this month are the highest since the depths of the Great Recession in October 2008 -- and raised the question, what comes next?

A Thomson Reuters analysis of the FTSEuroFirst 300 .FTEU3 shows there have been five previous bear markets since the index of leading European shares was launched in 1997, averaging 11 months' duration and with a peak-to-trough fall of 42 percent.

It took an average of 35 months once the cycle started to revisit the previous high, although the market has still not reached its all-time peak, hit in September 2000. The current bear market is nine months old and the index is down 24 percent.

Similar analysis of Britain's FTSE 100 .FTSE shows seven previous bear markets since its launch in 1986, averaging 11.5 months with a peak-to-trough decline of 32 percent.

It took an average of 49 months once the downturn started to revisit the peak. Again, the current bear market is nine months old and the index is down 21 percent.

"The 20 percent pull-back level often acts as a short-term support level. But in true bear markets that gives way eventually, and when it does, the falls are dramatic," said Bill McNamara, technical analyst at Charles Stanley.   Continued...

Traders work at the Barclay's post on the floor of the New York Stock Exchange January 26, 2016. REUTERS/Brendan McDermid