Bear markets can be classified and sub-divided in many different ways. On the issue of longevity, some run for years while others end after a few months. The level of pain is another obvious dimension. Some downturns are extremely painful while others are quite mild.
Here is a fresh way of classifying downturns that you will not find in any textbook.
An analysis of all recent bear markets finds that some are triggered by a single problem or group of related problems.
Others are caused by a series of separate and unrelated issues.
I tend to think of them as "single trigger" versus "multiple trigger" downturns.
A good example of a single trigger downturn occurred in 1981 when Federal Reserve chairman Paul Volker announced that inflation was sapping the vitality of the financial system and needed to be neutralised once and for all.
He raised interest rates and threatened to keep raising them until inflation was tamed. Investors panicked. The UK stock market tanked by 21 per cent.
Another recent single trigger bear market occurred in 1990 when high UK inflation led to high interest rates and a subsequent recession. The UK stock market fell by 22 per cent.
"Multiple trigger" bear markets are downturns caused by a series of separate issues that occur close together.
The 51 per cent drop in 2000-3 is a good example. Fears about an economic slowdown started the ball rolling. Next came a bursting of the tech bubble and, later, an attack on the World Trade Centre.
A final selling wave occurred in the first quarter of 2003 when insurance companies were forced to sell shares in order to maintain their capital adequacy ratios.
The 1987 Crash was another multiple trigger downturn. Selling was initially triggered by deteriorating economic conditions including inflation fears and rising trade imbalances. But major investment houses took little notice because they all believed in a new-fangled hedging technique called portfolio insurance which would protect their profits in the event of a downturn.
Unfortunately, the portfolio insurance concept didn't work.
Frightened institutions bailed out of shares all at once in late-October 1987. It caused the biggest two-day drop in memory and a total bear market decline of 37 per cent.
History teaches that single trigger downturns are generally in the 20-30 per cent range. Multiple trigger drops are often more painful
This rule of thumb is not iron-clad. There are some exceptions. For example, shares fell sharply in the third quarter of 1998.
The first trigger was a surprise collapse of the LTCM hedge fund. It was soon followed by Russia's default, an unrelated factor.
Investors panicked and Federal Reserve Chairman Alan Greenspan drastically lowered interest rates. His action helped to stabilise the world's stock markets. UK shares fell by "just" 25 per cent. It proved to be an exception to the rule that multiple trigger downturns are often more painful than single trigger drops
This brings us the bear market of 2007-8. How big will it be?
Obviously, no one knows with certainty. But if you apply the "single trigger" versus "multiple trigger" concept, an important fact pops out.
The painful share price losses of the past year were essentially caused by irresponsible banking practices. Many bankers provided money to unworthy borrowers. They compounded the problem by grouping these loans into packages, sometimes highly leveraged, and sold them on to other institutions. Other bankers borrowed short-term and lent long-term, a no-no when it comes to responsible banking.
Many of the news headlines in the past 12 months have concentrated on real estate and a collapsing financial sector. They are all linked – in other words, a single trigger downturn.
Rising oil and commodity prices became headline grabbers in recent months but these issues now appear to be fading.
So how painful will the current downturn be? If inflationary problems continue to fade in importance, look for a stock market drop no greater than 30 per cent which is the top of the range for single trigger bear markets.
At the low point a few weeks ago, the UK stock market had slipped by 28 per cent from its June 2007 peak. In other words, history hints that we might currently be near a bottom or perhaps one further selling wave away.
But should unanticipated problems emerge like a return of rising food and energy prices, a steep recession, or even unexpected military action, all bets are off.