Chet Currier—Resist Euphoria and Gloom as Markets Run Course

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So much for the trend to shorter and shorter bear markets.

In the past couple of decades, periods of falling U.S. stock prices had been taking less and less time to run their course as Wall Street settled into a golden age of prosperity. By the summer of 1998, an entire declining phase of the cycle could be completed in six and a half weeks.

It looked for all the world as though the grind-you-down, wear-you-out style of bear market so common in earlier generations had gone the way of green eyeshades and paper ticker-tape.

Alas, not so. Like a horror-movie creature rising from the castle ruins, the old monster is back. As of this writing, the Dow Jones industrial average has gone more than 430 dreary days, by my count, since its last record closing high, at 11,722.98 on Jan. 14, 2000.

From a table of 20th century market cycles in the Hirsch Organization’s Stock Trader’s Almanac, we see that this already qualifies as the longest bear market since 1981-82, when the Dow took 472 days to get from top to bottom. In the longest stretch since World War II, the average endured a 694-day decline from January 1973 to December 1974.

Hirsch used data compiled by Ned Davis Research Inc., which defines bear markets not simply by percentage ups and downs, but by criteria that also take elapsed time into account. Though you can quibble, if you wish, about the use of the 30-stock Dow rather than a broader market average, it has a long history to measure by.


Beast of Tokyo

Whatever standard you use, the worst recent bear markets in U.S. stocks look tame next to the deathless brute now bedeviling stocks in Japan. In 11 years from the end of 1989 to the end of 2000, the Nikkei 225 Index lost almost two-thirds of its value.

In the U.S. market, we’ve established that this isn’t going to be one of those fleeting buy-the-dips opportunities investors got used to in the ’80s and ’90s. There’s a disturbing awareness that even long-term investors in stocks get no guarantees.

Let’s dramatize that with some theoretical numbers. From the end of 1979 through the end of 1999, the Standard & Poor’s 500 Index averaged an 18 percent annual return.

Suppose that by the end of the next 10 years the index must get back to a longer-term growth rate of 10 percent a year, which is around the historical norm. Aargh! That would mean we face a decade of net declines.

Using the personal savings plan analyzer on my Bloomberg terminal, I calculate that $1,000 invested at 18 percent a year for 20 years grows to $27,393.04. The same amount invested at 10 percent a year for 30 years comes out to $17,449.40. If you’re aboard that train for only the last 10 years, it takes you in the wrong direction.


What ‘mean’ means

Fortunately, there is no law that says the market must get back to some 10 percent track. “We can talk about stocks regressing to the mean. We just don’t know what the mean is,” says Don Phillips, managing director at the research firm of Morningstar Inc. in Chicago. “We have to be humble about what we know about how asset classes perform.”

To me, that means resisting both euphoria and gloom as the market’s moods soar and plunge.

Now for some cheerier stuff from the historical record. Even in the dismal decade of the ’70s, as the economy struggled with inflation, multiple recessions and a political crisis or two, the Dow returned 5.2 percent a year. Almost all of that came from dividends, a component of stock returns that gets no respect in boom times but is nevertheless important.

On that basis, even if we face severe economic problems now, investors shouldn’t be too quick to shun stocks or stock funds. In less ebullient times stocks still could easily wind up competing pretty well with the alternatives in bonds and the money markets.

What’s more, any long-term investment plan for growth must take into account the eminently reasonable possibility that the good times aren’t gone forever after all.

The outcome of the current bear episode promises to take a long time to play out. They don’t call it long-term investing for nothing.

Chet Currier is a columnist for Bloomberg News.

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