TW: This market sucks. Unfortunately it may continue to do so for a long time. We will stay in it for sure but not with the expectation that our net worth will be appreciably higher anytime soon. The good news is that this bear market arguably is already eight years old, so only like eight more to go...
From the Economist:
"AT THE end of 1964 the Dow Jones Industrial Average traded at 874.1. Seventeen years later, despite rapid inflation, the average had inched forward only to 875...It is beginning to look as if we are in the middle of another of those great phases, what commentators call a secular, as opposed to a cyclical, bear market. Broadly speaking, the 20th century can be divided into six phases; bear markets from 1901-21, 1929-49 and 1965-82 and bull runs from 1921-29, 1949-65 and 1982-2000...
The Dow was trading below 9,000 on October 15th, a level it first passed in 1997. In other words, investors who bought stocks more than a decade ago have no capital gains to show for it, only dividends (and yields have been low throughout).
Why does this matter? The existence of a bear market does not preclude the possibility of fantastic returns over shorter periods. Indeed, one striking point about the Dow’s 936-point gain on October 13th was that it climbed more in that one day than it did in the first 85 years of its existence (it was founded in 1896). Two of the very best years in American stockmarket history were 1933 and 1935, right in the middle of the Depression.
But bear markets behave rather like Lucy in the Peanuts cartoon strip. Just when Charlie Brown is persuaded to attempt to kick the football, she snatches it away. Just when investors are persuaded the bottom of a bear market has been reached, share prices slump once more. The Dow closed above 1,000 in 1972, only to fall to 616 by the end of 1974. A rally in 1975 took the average to 852, but it then gained only a net 23 points over the next six years...
Snapping investors out of their bear-market mentality takes a lot of work. The shortest of the 20th-century phases was 17 years. With luck, time will move faster in the 21st century."
http://www.economist.com/finance/displaystory.cfm?story_id=12437747
2 comments:
Good stuff T. Here's a long but hopefully helpful add on.
Pimco did a very interesting study on 15-20 year boom bust cycles for equities. This has not been true for other asset classes. Bears are nasty and that's why they fight clawing down and bulls fight pushing their horns up.
There are signposts...dividend yields on the S&P are the highest we've seen since 1991. Dividend discount models are at fair value for the first time since 1984.
Mutual fund investors redeemed shares at triple the record in September at $75 billion and October will break that by a mile.
Convertibles, because of the unintended consequence of the ban on short sales which arb discrepancies, have 40% of the issues trading at 10% below theoretical value. Unprecedented.
The good news is bear markets end and we all know "the trend is your friend until the end when it bends".
If you look at the last 10 bear markets since WWII they've averaged a 33% decline. The average recovery was one and a half years from the bottom back up. '73-'74 was 2 years and the longest was before the Korean War when people were hoarding because they anticipated rationing again. That market took three years.
Here's a piece from WSJ...
If you bought stocks after a 40% decline in 1930, you faced a further severe decline. Stocks had another 40% or so more to drop, but that's a much higher percentage of the price you just paid. Measured from 1930 to the low in 1932, the S&P 500 lost nearly three-quarters of its value.
But look what happened as the years passed: Based on data compiled from the Federal Reserve, $100 invested in stocks on Jan. 1, 1928, was worth $98.75 by the end of 1930. At the end of 1935, they were worth $110.18, a 12% gain. At the end of 1940, during the darkest days of World War II, they were worth $107.37, which was still a 9% gain. And if you held the stocks for 20 years, they were worth $355.60, a nearly 260% rise.
Cash, of course, appreciated little. Short-term Treasury bills rose 5% from the end of 1930 to the end of 1935, and were just a hair higher by the end of 1940. At the end of 1950, T-bills had gained 11%. Ten-year Treasury bonds fared better over five (22%) and 10 years (49%), but over the 20-year period they returned 81%, far shy of stocks' 260% climb.
Now let's continue with our assumption that things are as bad now as the Great Depression, meaning the S&P 500 has another three-quarters decline ahead of it. Let's say you bought stocks at the end of 1932, when things looked their bleakest. Five years later, stocks had gained 86%; in 10 years 120%; and in 20 years 926%. Comparable numbers for 10-year Treasurys are gains of 22%, 41% and 75%, respectively. In other words, stocks substantially outperformed bonds in each period.
What does that mean for investors today? I'll leave you to play your own parlor game and draw your own conclusions.
See ya at Erie Cafe at 6am tomorrow!
thx for the comment!
u will really like the new post!
hopefully u r right.
Erie Cafe? Is that your polling place, ours is that new high rise apt bldg between us and EBC.
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