Bear Market Declines
“Historically, bear markets tend to last 1/3 to ½ as long as the preceding bull markets. Since this bear market is in the process of correcting the 17-year bull market of 1949 to 1966, a rough rule-of-thumb would be that the bear market could last five to eight years (and I will be optimistic in that I hope it lasts nearer to five than eight). However, the interesting part of the picture is that with four years out of the way, the worst the Dow Industrials have done is to decline from their 1966 peak of 995.15 to their 1966 low of 744.32, a total drop of 251 points (Russell, Richard. Dow Theory Letters. January 7, 1970. Letter 449. Page 1.).”
As a “rule-of-thumb”, the 1/3 to ½ (in terms of duration) extent of a bear market decline is pretty good and very consistent. The examples are many and the data is clear. First, let’s take the 1966 peak as the beginning of the bear market. From that time, the ultimate low in the stock market was December 1974. This was eight years from the 1966 peak. True stock market enthusiasts would argue that the bear market for stocks did not end until 1982, when the Dow Jones Industrial Average “permanently” broke above the mythical 1000 level and never looked back. Die hard market historians make a credible claim that the bear market did not end until the inflation-adjusted low achieved in 1978 or 1982.
However, based on the work of Jeremy Siegel (“The Nifty-Fifty Revisited: Do Growth Stocks Ultimately Justify Their Price?” [PDF download]), even if a person had bought the “Go-Go” or “Nifty Fifty” stocks at the 1966 or 1971 peak, investors would have achieved exceptional gains in spite of the high inflation rates until 1982 (by the end of 1995, in support of the “buy-and-hold” strategy).
The amount of time that passed from the 2007 peak to the 2009 low was 18 months. This was 38% of the bull market that preceded it from 2003 to 2007. The decline was severe and few would be in the position to stomach the extent of the decline, however, the rebound was inevitable and equally as vicious.
Our default view generally gravitates towards the stock market crash of 1929 to 1932. Even our cautiously optimistic analysis should be thwarted by one of the worst bear markets in history. However, taking note of the fact that the bull market “officially” began in 1921 and unofficially in 1907 or 1915, it is clear that the rule-of-thumb holds up.
Market enthusiasts will often retort that the bear market ends when the market recovers beyond the previous peak as the majority of investors buy near the last market peak. This is a valid point and yet, investing is made better by understanding that the majority is usually wrong and therefore should fight the urge to commit 100% of their investment capital as the market climbs higher and ensure that saved funds are 100% invested as the market falls. There are many benchmarks for determining how low is low enough before 100% of funds are committed so being close enough is better than succumbing to the fear of a falling market.
Where Did All the Depressions and Collapses Go?
“Finally, I want to draw attention to the phenomenon of changing mass psychology within a bear market. So far, the public has exhibited remarkable faith in the Government and its wisdom. It’s an empirical faith, born out of experience. There has been no collapse or depression since the 1940’s. This is contra to all prior U.S. history, which shows that a quarter century has never passed without some sort of financial collapse. How did it happen? The public is only too happy to give full credit to the politicians, and the politicians are only too happy to take full credit for this remarkable period. However, no one thinks of the cost (for instance, in debt and inflation) which has gone into producing this era of ‘prosperity’. But now the costs are beginning to become more obvious. Interest rates are being questioned, military budgets (for the first time) are being questioned, the basis for prosperity itself is being questioned (Russell, Richard. Dow Theory Letters. January 7, 1970. Letter 449. Page 2.).”
Where and when did this shift occur in the U.S. economy that managed to dodge collapse and depression? Prior to 1914, the stock market experienced two -50% declines, two -45% declines, one -31% from 1860 to 1907. The booms in the stock market were bombastic and the crashes were definitely devastating.
Recessions were more frequent and deeper than after 1914. In one case, 1873 to 1879, the recession lasted 50% longer than the decline from 1929 to 1932. In a feat of unrivalled parallel, the period from 1857 to 1908 spent more months in recession (291 months) than the period from 1913 to 2009 (285 months) [source: NBER.org]. Essentially this means that a 51 year period packed in the equivalent of 23 years in recessions (45%) while a 96 year period had 23 years spent in recession (24%).
The question, did the Federal Reserve really cause the change and what is the ultimate cost? Yes, we know that debt and inflation are the SYMPTOMS of economic “stability” but what are the consequences? Most lines of reasoning follow the view of the Roman empire decline. A systematic and incipient decline that is noted by some by generally ignored by the majority, whose responsibility it is to “avoid or avert” such catastrophes.
A personal stance is that the success of the economy to not experience recessions as frequently and as deep is primarily due to the U.S. having a continually shifting and diverse economy. Since we can empirically demonstrate that the Federal Reserve has generally followed market rates before making decisions to increase or decrease the much talked about, but of little importance, Federal Funds Rate, there is a good chance that the Fed’s role in the U.S. economy is far more muted that most would like to accept.
For now, the experiment of having a Federal Reserve has helped us get by until some other nation can take the top rung on the economic ladder. All bets are that “communist” China is being groomed to be the heir apparent with the largest democracy of India being the underrated second place candidate. From what we can tell, the decline of the “empire” doesn’t usually come until long after there is a credible successor. Ideally we need at least two before the clear collapse takes place. At one time, it was a sure bet that Japan would be the winner and title holder yet that crowning has been either delayed or denied altogether.
Gridlock Ensures Excesses
“The best I see ahead is a period of ‘economic suspension’ a sort of drift toward more of the same. And this type of policy will only succeed in building more excesses into the economy, in throwing more and more factors out-of-kilter. This might allow for more upside action by the market, until it is seen that the ‘suspension’ policy is a fraud- not a solution (Russell, Richard. Dow Theory Letters. January 7, 1970. Letter 449. Page 3.).”
Considering that this was written in early 1970, the view by Russell was prescient. It is often suggested that Wall Street likes gridlock in Washington as it allows for “more of the same.” Russell’s perspective that “more of the same” actually builds excesses and puts the health of the system “out-of-kilter” is a refreshing take on the topic.
Bankers Know Best…Maybe Not
“I was interested in the article in the December 22 issue of U.S. News & World Report entitled ‘Size-up of 1970.’ This article was a tabulation of questions put to 700 leading investment bankers. I’m going to be contrary and state that in general the majority of professional opinion is wrong. No, I’m not slighting the amateurs, the majority of amateur opinion is also usually wrong, but maybe it’s more dramatic when the professionals go on the line.
“Their last question interested me most. ‘Where will the Dow-Jones Industrial Average be at mid-1970?’ There were various ranges offered, but the net result was that 647 bankers believed that the Dow would be above 750 by mid-1970 while only 40 thought the Dow would be below 750. That response struck me as amazing. It means that only 6% of the bankers thought the Dow will be under 750 by mid-1970 while a whopping 94% thought the Dow would be at 750 or better (Russell, Richard. Dow Theory Letters. January 7, 1970. Letter 449. Page 4.).”
Below is the chart of the Dow Jones Industrial Average as it traded on January 7, 1970 when Letter 449 was published and at the low on May 26, 1970. The bankers were so wrong, this time.
