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Which bear is it this time?

There is no argument now. We are in a bear market. Indeed, given that the FTSE 100 index failed to reach the level attained at the end of 1999, there is even an argument that we never really escaped from the new millennium bear phase, except that the recovery did take most markets into new high ground, including our own FTSE 250 index.

But the fact remains that shares overall have made no real progress in the past decade – hardly a ringing endorsement for the cult of the equity.

If you accept the American definition that a bear market is one where the relevant indices fall by 20 per cent or more, peak to trough, then there have been more bear markets in the past half-century than you might imagine.

Of course, indices change. When I first started in the City, the only UK measure ever quoted was the FT Industrial Ordinary index. Comprising just 30 stocks, inclusion was more arbitrary than for the current set of indices while no allowance was made for the size of the company.

In the mid 1960s, the FT Actuaries indices were inaugurated, with the All-Share providing probably the best measure of overall stockmarket performance. I use a chart of the annual total return numbers in a presentation I give to private investors to demonstrate that investors are more likely to make money out of UK equities than to lose it.

Remarkably, for the 42 years for which full-year figures are available, only 10 delivered negative returns. There was even a positive outcome for 2007.

Yet, according to David Schwartz, a stockmarket historian, there have been 14 bear markets since 1950 – an average of one every four years. Of course, not all bear markets have the duration – or scale, for that matter – of 1973-74 or 2000-03 – the two worst in my experience.

There were two negative return years for the earlier bear market on my index chart and three for the new millennium downturn. In other words, half of the negative years that appear on my chart are accounted for by these two events.

They were seismic in their effect. By the end of 1974, shares had fallen by more than 70 per cent in value while the more recent bear market saw the headline indices drop by a little over half.

Some bear markets took place in a single year which still managed to deliver a positive outcome. In 1987, when Black Monday unsettled the City in the wake of the hurricane that had swept through South-east England the previous week, shares fell by more than a third, but the Actuaries’ index recorded an 8 per cent total return for the year.

This was not a bear market born out of impending recession or financial irregularities – although Chancellor Nigel Lawson feared it presaged an economic downturn, leading him to loosen monetary policy with unfortunate consequences. Rather, it was a swift downward correction that blew away the froth that had been building in the market after Big Bang changed the landscape of the Square Mile for all time.

The FTSE 100 index had actually risen by 40 per cent during the first eight months of the year. The speed of the correction owed more to the interaction of the cash and futures market than anything.

Similarly, in 1990 and 1991, a recession, coupled with high interest rates to calm the inflation engendered by Nigel Lawson and a collapse in house prices, saw shares fall by 21 per cent peak to trough. But while 1990 turned out to be a negative year, we saw growth of over 20 per cent the following year on a total return basis.

What investors will be asking themselves now is do current conditions resemble any of the earlier set of circumstances that accompanied a bear market and, if so, are there any lessons to be learned?

Conditions some 18 years back do have some parallels with today but I fear the conditions that conspired to upset the market back in 1973 are closer. The oil price had quadrupled, there was a banking crisis and inflation was re-emerging as a serious threat.

It all sounds familiar but then we also had less globalisation and generally impotent central banks. Perhaps that will make a positive difference this time. Until we know for sure, though, investors can be forgiven for looking over their shoulders and worrying.

Brian Tora (brian.tora@centaur.co.uk) is principal of the Tora Partnership

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