A Time to Invest!
We consider this message to be one of the most important we have sent to clients. Please take some time to read and review the accompanying pages. Important: Page 10 – “Opinions and Conclusions” sums up our long-term expectations.
All asset classes have major cycles that culminate in booms and busts. The stock market is no exception. It is our opinion that mankind has not changed since we began to walk upright, and many of us are inclined to act irrationally due to the basic emotions of fear and greed. By studying historical cycles, we are better able to recognize the times when the vast majority will act in concert with the popular mania of the moment. This will not change. The preponderance of investors will always be manipulated and persuaded because they don’t do their homework and cannot make logical, independent decisions. The road to wealth has never been crowded.
Because most investors are followers, they will act rashly and impulsively, selling each time prices fall, or becoming too euphoric when prices jump higher. We can profit from the knowledge of their actions, but heaven help us should we fall under their influence.
Multi-year Bull Markets end because the majority of stock prices have been driven too high. This is much like the real estate market of several years ago. In 2005, how many people could not wait to buy real estate and believed it a solid investment? How many want to buy it today, 6 years later, at much lower prices?
When Bull Markets are over, Bear Markets begin. Prices drop then rally, then drop again. Like real estate, prices don’t make new highs. Bear Markets are catch-up times. Corporations continue to grow their business, expand their product base, and find new markets and clients. But – while this is occurring, the value of the shares of these companies languishes and prices drift sideways or lower.
Bear Markets Since 1900
Our definition of a “Bear Market” is a market that does not make new highs in the popular averages for an extended period of time. After each advance, it turns and heads south again. This up and down movement continues for a number of years. Eventually, it exhausts the patience of even the long-term holders.
In the past, when Bear Markets have ended, it has proven an extraordinary time to buy. Business and economic news is terrible. Companies file for bankruptcy and earnings are poor to non-existent. In this climate, the market slowly starts to go up; a new bull market is born. It is the time to buy, but nobody rings a bell. We will have drops and down cycles, but the overall trend will be advancing. Historically, these emerging prices have proven to become long-term bull markets and typically go on for 15 to 20 years or more.
It is a time to acquire serious wealth!
In March of 2000, the Standard & Poor 500 Index reached a high of slightly over 1550. Today, this same Index stands at 1162. For over 11 years the stock market has continued to decline or drift. During this time some businesses have suffered or vanished while others have prospered mightily. Borders, a recent casualty, cannot sell enough books because people are reading on Kindles or iPads. Changes are not necessarily detrimental to our lives or economy; they simply represent transition, and are frequently beneficial to us all. New medicines and medical techniques continue to be developed, and the US is a leader in this arena. Technology has exploded, enhancing the ease and efficiency of doing business. Companies have added to their client base, created new markets, and become more adept at delivering their products or service. Consider only one aspect; the ease of communication, through text, verbal, or visual, not only locally, but across continents.
When stocks eventually start higher and the averages go to new all-time highs (and that will happen!), we will not be surrounded by glorious news. Some people will only invest fearfully and with serious trepidation. Many will not invest at all and will miss the boat entirely leaving their money to earn 1% or less in CDs, which, after taxes, will almost certainly lose value due to continuing inflation.
The following pages list four lengthy Bear Markets:
Major Bear Markets
In measuring the markets, we used the Dow Jones Industrial Average up until the year 1999. Since the year 2000, we used the S&P 500. The S&P 500 was not accurately calculated in the early years.
1906 to 1915 Bear Market – 9 years
In 1906, the DOW touched a high of 103. World War I came along in 1914, and the Government closed the stock market for 6 months. When the market closed, the DOW was a little over 70. It re-opened at 53, which proved to be the Ultimate Bottom. From 103 to 53 was a drop of 49%.
Over the next 14 years the DOW advanced until it hit a high in 1929 of 381. The move from 53 to 381 is a gain of 718%.
Items in the news which occurred near or after the Ultimate Bottom, and during the subsequent Bull Market:
- 1914 – WWI began
- 1917 – United States enters WWI
- 1917 – House approves 7 billion for war
- 1917 – Government takes control of sugar industry
- 1917 – Government takes control of commodity imports
- 1918 – Severe grain famine in Russia and Great Britain
- 1918 – Prohibition of liquor adopted in US
- 1918 – US influenza deaths exceed war casualties
- 1919 – US imposes trade restrictions
- 1919 – Coal miners strike
- 1919 – Treaty of Versailles ends WWI
- 1920 – Bomb explodes in Wall Street near JP Morgan Bank
- 1920 – Women’s suffrage right to vote
- 1921 – Emergency Quota Act on Immigration
- 1921 – 20,000 business failures; 35 million unemployed
- 1921 – Insulin discovered; help for Diabetes
- 1922 – President Harding dies in office
- 1924 – Germany restructures their currency
- 1925 – Hitler resurrects National Socialist German Workers Party
- 1926 – German economic collapse; Black Friday
1929 to 1942 Bear Market – 13 years
Note: We are using 1942 as the key buying point after the stock market crash which began in 1929. This gives that particular Bear Market, the longest at a 13 year time frame. The real bottom after 1929 was reached in 1932, only 2½ years later. (It is interesting to note that during the worst economic period of the Great Depression, from 1932 to 1937, the Dow Jones Industrial Average gained almost 500 percent.) We view 1932 as very extreme, so we are calling 1942 the real bottom.
In 1929, the DOW’s peak was 381. It was probably driven by several things: euphoria of investors and almost unlimited expectations, margin requirements as low as 10%, and the song, Happy Days are Here Again. If the market was excessively high in 1929, it was certainly driven to a low that was extreme to the point of being ridiculous and absurd. That low was touched quickly, and over the next five years until 1937 during the worst of the depression, the DOW gained almost 500 percent.
Between 1937 and 1942, there were major cycles, both up and down. The difference between the 1929 high of 381 and the 1942 low of 93 represented a drop of 76%.
In 1942, the Dow, after hitting the low of 93 embarked upon a new bull market, which did not culminate until 1966 at a peak of 995, twenty-four years later. The low of 93 to a high of 995 represents a gain of over 1,060%.
Items in the news which occurred near or after the Ultimate Bottom, and during the subsequent Bull Market:
- 1941 – Germany attacks Russia
- 1941 – Japanese bomb Pearl Harbor; US enters WW2
- 1942 – Price control bill signed
- 1942 – Battle of Midway
- 1942 – Wartime rationing begins
- 1944 – Government spending equals 58% of GNP
- 1944 – Allied invasion of Normandy
- 1945 – Atomic bombs dropped on Hiroshima & Nagasaki
- 1945 – Franklin Roosevelt dies
- 1945 – WW2 ends
- 1946 – Steel workers strike
- 1946 – Mine workers strike
- 1948 – Blockade of Berlin by USSR
- 1948 – Marshall Plan established to aid Western Europe
- 1949 – Soviets detonate atomic bomb; nuclear arms race begins
- 1950 – Korean War begins
- 1954 – Brown vs Board of Education ends segregation in schools
- 1956 – Egypt seizes Suez Canal
- 1957 – Sputnik launched
- 1958 – Longest steel strike in US history (6 months)
- 1960 – OPEC is founded
- 1961 – GE and others found guilty of price fixing
- 1961 – Berlin wall erected
- 1961 – US cuts off relations with Cuba
- 1962 – March on Washington
- 1962 – Bay of Pigs
- 1962 – Cuban missile crisis
- 1964 – First combat troops in Vietnam (190,000 by year’s end)
1966 to 1975 Bear Market – 9 years
In January, 1966, the DOW hit a high point of 995. A final low of 578 was touched in December 1974, nine years later. The drop in this Bear Market from the high of 995 to the low of 578 was 42%.
The market had major swings from the 1975 bottom, and effectively crossed the previous high in 1982. The Dow continued to advance until the year 2000, when it reached 11,750. The 25 year climb from DOW 578 to
DOW 11,750 was a total gain of more than 2,000%.
In the news listed below, note the news items that appeared in and after 1980. The market exploded through the old highs in 1982, and was well on its way to much greater heights.
Items in the news which occurred near or after the Ultimate Bottom, and during the subsequent Bull Market:1974 – Nixon resigns
- 1975 – Fall of Vietnam
- 1975 – New York City bailout
- 1978 – Three Mile Island nuclear accident
- 1978 – Ayatollah Khomeni takes power in Iran
- 1978 – Iran seizes US embassy, takes hostages
- 1979 – Chrysler bailout
- 1980 – Gold peaks at $850 per ounce
- 1980 – Hunt brothers attempt to corner the silver market
- 1980 – Ford reports $595 million loss, biggest ever for a US
- 1980 – Sales of all US autos at a 19 year low
- 1980 – Prime rate at record high, 21.5%; annual inflation is 5%
- 1980 – Soviet grain embargo; response to invasion of Afghanistan
- 1980 – Assassination attempt on President Reagan
- 1981 – Air traffic controllers strike; strikers fired by Reagan
- 1982 – British Falklands war
- 1983 – Washington Wtr Power AAA muni bonds default, 2.25 bil
- 1983 – Breakup of AT&T
- 1984 – Union Carbide gas leak at Bhopal, India; est. 20,000 killed
- 1984 – US becomes a debtor nation for the first time since WWI
- 1985 – Ohio bank panic; 71 banks closed
2000 to 2009 Bear Market – 9 years
Is this one over or near being over? Measuring this market, we use the Standard & Poor 500 Index because we believe it is a more effective gauge of the market as a whole. In March of 2000, the S&P peaked at 1553. It then went into a drop and fell to under 770 in late 2002. It then proceeded to advance back to the highs in June of 2007, and then went into a heart- wrenching drop which ended in March of 2009 at a low of 667.
The drop in this Bear Market from the high of 1553 to the low of 667 was 57%. As you can see from the other Bear Markets listed, this is not terribly unusual; long and painful, but not terribly unusual.
Items in the news which occurred before or near the low in March of 2009:
- 2008 – Crude oil hits $100 per barrel for the first time
- 2008- Oldest money mkt in US, Primary Reserve Fd, breaks the buck
- 2008 – Primary Reserve Fund halts redemptions
- 2008 – Lehman Brothers files for bankruptcy; largest in US history
- 2008 – Bear Stearns failure; taken over by J P Morgan
- 2008 – AIG bailout
- 2008 – Senate passes 700 billion financial package, quantitative easing
Opinions and Conclusions
The recent volatility in prices and hard swings to the downside creates confusion, fear, and engenders selling by investors who, once their stocks are sold, have no clue as to what to do with the proceeds of their sales. This is indicative of bottoms – not of tops!
As long as our Government continues to create (i.e. print) money at an ever increasing rate, as they have been doing, the value of our dollar will continue to erode. Put simply, we will have rising prices otherwise known as inflation. This means the prices of “things” will go up. This includes precious metals, commodities, collectibles, real estate, and stocks with solid balance sheets, and increasing earnings. There is currently an enormous amount of liquidity (cash) on the sidelines, and holders will not be content to let it sit idle earning almost zero. We are convinced it will find its way into certain asset classes including the shares of growing companies.
When Bear Markets begin to emerge from their lows, it does not mean all stocks will advance steadily without hesitation. Markets will continue to climb a wall of worry! One of our good friends and clients discovered a valuable truth in 1993: “Markets tend to rise when business is bad, deteriorating, or not significantly improving.” He has been hugely successful with his own investments.
It is our opinion that the Bear Market, which began in March of 2000, touched its final low in March of 2009 with the S & P 500 Index dropping below 700. We believe the bottom has already been reached. Consequently, we believe that buying and continuing to track a well-selected portfolio of stocks over the next one or two years, will prove very profitable over the coming five to ten years.
We are not throwing caution to the wind. It means that we must work harder than ever to ferret out those golden nuggets which will grow into the powerhouse companies of the future. However, we believe there is more opportunity now than we have seen for years!
Remember: New Bull Markets are born when investors are pessimistic and the general economic news is dreadful.
“Be fearful when others are greedy, and be greedy when others are fearful.”