If everyone is buying and holding,
why does the Market drop?

The contraction or "Bear Market" from April 2000 through to October 10th 2002 was the most severe since the Great Depression; although severe, this type of environment is common throughout market history.

 
When prices are high, many are selling.
Expansion and Contraction in Markets
Market Cycles defined by the S&P 500 Total Returns (%) (Source: Dimensional Funds)
Up Markets" Expansion Phase   Down Markets" Contraction Phase
Dates # of
months
S&P
500
  Dates # of
months
S&P
500

Dec. 1929 - Mar.1930 4 21%   Apr. 1930 - Jun. 1932 27 -80%
Jul. 1932 - Aug. 1932 2 92%   Sep. 1932 - Feb. 1933 6 -30%
Mar. 1933 - Jan. 1934 11 105%   Feb. 1934 - Jul. 1934 6 -21%
Aug. 1934 - Feb. 1937 31 135%   Mar. 1937 - Mar. 1938 13 -50%
Apr. 1938 - Dec. 1938 9 61%   Jan. 1939 - Apr. 1939 4 -6%
May 1939 - Sep. 1939 5 22%   Oct. 1939 - May 1940 8 -26%
Jun. 1940 - Oct. 1940 5 22%   Nov. 1940 - Apr. 1941 6 -13%
May 1941- Aug. 1941 4 14%   Sep. 1941 - Apr. 1942 8 -22%
May 1942 - May 1946 49 49%   Jun. 1946 - Apr. 1947 11 -21%
May 1947 - Oct. 1948 18 23%   Nov. 1948 - Jun. 1949 8 -10%

Jul. 1949-Jul. 1957 97 429%   Aug. 1957- Dec.1957 5 -15%
Jan. 1958- Dec. 1961 48 105%   Jan. 1962- Jun. 1962 6 -22%
Jul. 1962- Jan. 1966 43 90%   Feb. 1966- Sep. 1966 8 -16%
Oct. 1966 - Nov. 1968 26 52%   Dec. 1968 - Jun. 1970 19 -29%
Jul. 1970 - Dec. 1972 30 76%   Jan. 1973 - Sep. 1974 21 -43%
Oct. 1974 - Dec. 1976 27 86%   Jan. 1977 - Feb. 1978 14 -14%

Mar. 1978 - Nov. 1980 33 86%   Dec. 1980 - Jul. 1982 20 -17%
Aug. 1982 - Aug. 1987 61 282%   Sep. 1987 - Nov. 1987 3 -30%
Dec. 1987 - May 1990 30 71%   Jun. 1990 - Oct. 1990 5 -15%
Nov. 1990 - Apr. 1998 90 345%   May 1998 - Aug. 1998 4 -13%
Sep. 1998 - Aug. 2000 24 63%   Sep.2000 - Sep. 2002 25 -45%

Annual gains experienced by a HOLD strategy over 20 years 1929-1949 = 3.8% per yr.
Annual gains experienced by a HOLD strategy over 12 years 1966-1978 = 4.1% per yr.
 
Expansion Phase Averages   Contraction Phase Averages
22 "Up Markets" 1926 - 2000
Average length 31 months
Average 117% gain per cycle
  22 "Down Markets" 1929-2002
Average length 10 months
Average 26% loss per cycle
 
 

Does your advisor ignore the Business Cycle? There is more out there than Buy and Hold. Contact us at: 1 866 792 3991


Cory Venable CIM, FCSI, CMT
Technical Market Analyst
Danielle Park LL.B., CFP, CFA
Portfolio Manager