This is not your average bear market

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SAN FRANCISCO -- Volatility on Wall Street has most people running for cover. Others are reaching for a measuring stick.Counting Tuesday's 508-point plunge, the Dow Jones industrial average is down one-third from its high a year ago.How does that compare with previous downturns?The stock market lost almost 90 percent of its value during the Great Depression. During the most recent bear market, which lasted from March 2000 to October 2002, the market lost about 50 percent.Since 1926, there have been 18 bear markets, a situation usually declared when a stock index drops more than 20 percent from its previous peak. During the average bear market, the Standard & Poor's 500 index has declined 36 percent, according to the Leuthold Group, a Minneapolis investment firm.Coincidentally, on Tuesday the S&P 500 was down 36 percent from its high on Oct. 9, 2007.If this was an average bear market, it would be over by now. But given the severity of the financial crisis, many observers say the current bear will look more like Ursa Major than Ursa Minor."I am inclined to think this would be deeper than an average bear market," says Paul Krsek, chief investment officer of K&A Asset Management in Napa, Calif. "We keep getting surprised by the depth and breadth of this problem. Every day we turn a new page in this book, and every day there's a nasty surprise on the next page."Krsek, among other advisers, would not be surprised to see stocks fall roughly 50 percent from their previous highs, as they did in 2000-2002, in 1973-1974 and two other times since 1937."We are all in cash. We are waiting this out. I don't want to lose another 30 percent," Krsek says. "Somewhere you get to the point where it is a buying opportunity of a lifetime. We may just not be there yet," he adds.Others say that with stocks down 36 percent, we are closer to a bottom than a top."We are now in the range of historical norms when new bull markets begin," the Leuthold Group says in a report. "Historical standards suggest most, if not all, of the bear damage has already been done."Andrew Engel, a senior analyst with the firm, says, "We are relatively bullish at this point. When we look at valuations, if you look out a year from now, this may be a good buying opportunity. You could continue to go down a little more. But you haven't seen valuations this low since the early 1980s."Engel says the market is showing signs of capitulation, a period of frenzied selling that often marks the end of a bear market. "Nobody wants to have anything to do with the stock market," he says.I asked Richard Sylla, an economist and financial historian at New York University's Stern School of Business, whether stocks could lose 80 percent or more, as they did during the Great Depression."It could happen again, but I don't expect it to," he says.One big difference is that during the Depression, there was no deposit insurance. As customers withdrew their money, "you had banks failing right and left. About 7,000 and 8,000 failed between 1929 and 1932," he says."The whole economic policy stance then was bad. The Federal Reserve was designed to come to the aid of banks that were in trouble. For some reason, it didn't," he says.Today all banks carry deposit insurance, and the government recently raised the basic per-person limits from $100,000 to $250,000, which reduces the danger of a fatal bank run.Instead of standing by and watching banks fail, the government is arranging marriages with healthier institutions and making unprecedented amounts and types of liquidity available."I think the passage of the bailout program marks the beginning of the end of the crisis," Sylla says.He admits that the stock market, which had been in an "orderly retreat" before the bill passed, "is getting to be sort of a rout." But, he adds, "They say it's always darkest before the dawn."Sylla wouldn't be surprised to see the market fall an additional 10 percent. "I suspect there's another shoe or two to drop.Nevertheless, five minutes before the market closed Tuesday, he put some money into a growth-stock fund. He plans to add some more in a month or two and more in three months. "I think these are bargain prices," he says. "I plan to hold it five or 10 years if I live that long. The average price will look good five or 10 years from now."(E-mail Kathleen Pender at kpender(at)sfchronicle.com)(Distributed by Scripps Howard News Service, www.scrippsnews.com.)