When Market History Rhymes
By Thomas Kurlak
Special to TheStreet.com
4/10/01 8:04 AM ET
Criticism of market pundits trying to call a bottom is fairly widespread lately. That is probably a good thing, because it shows that sentiment is bearish and wants to stay that way. Those who have sold are comfortable in cash, and those who are short don't want to hear about a bottom anytime soon.
But a glance at a 50-year chart of the market reminds us of why calling bottoms is so worthwhile. The relentless, upward march of stock prices -- driven by corporate profits -- is the primary trend of the market over any long period.
Bear markets look like momentary wrinkles on the chart that, over time, need closer and closer examination just to find. However, while they are happening, they are pretty ugly. And, because bear markets tend to destroy the previous bull investment fad, the pain is exaggerated by the collapse of certain sectors of the market, such as technology this time.
Many investors recall or have studied the demise of the "Favorite 50" growth stocks of the early 1970s. Fewer of us remember lesser-known meltdowns, such as that of the first real estate investment trusts, in 1974-75.
Well-known today as fairly conservative income investments, the REIT phenomenon of that era was a get-rich-quick real estate play, backed -- like the dot-coms of 1999-2000 -- by the Wall Street IPO machine. It ended in a credit crunch so severe that many a "sponsoring" commercial bank watched its own stock get dragged down with the REIT carrying its name.
If we go back a little further to the lesser-known bear market of 1969-70, there is a relevance to today's events that is worth revisiting. That bear market, which lasted 18 months was, like today's bear, preceded by a decade of economic growth. Likewise, the Fed induced a tight money slowdown to head off emerging inflation, and fairly quickly put the economy into reverse. The bottom of that bear market was in June 1970, the day Penn Central went bankrupt.
Railroads were long into their postwar decay by 1970, but Penn Central was still a large corporate entity and its demise sent a shock wave through the markets and the country. That day, television news carried Paul McCracken, the chairman of the Council of Economic Advisors (then a more powerful post than now), calming investors and the public and assuring the country that adequate liquidity existed to prevent a depression. The Dow Jones Industrial Average was then at 650, and it went on to a 60% rise over the next 30 months.
Last Wednesday, word spread on Wall Street that Lucent Technologies (LU:NYSE - news - boards) was going bankrupt. While that was soon strenuously denied by management, the rumor of Lucent's demise was so unsettling that CNBC was literally afraid to repeat it on the air. The thought that the home of Bell Labs -- the cradle of the transistor -- could fail was a major psychological low for the market. It was compounded only two days later by the actual bankruptcy of the Pacific Gas & Electric unit of PG&E (PCG:NYSE - news - boards), a major electric utility brought down by California's power crisis.
Could the Lucent rumor and the Pacific Gas bankruptcy be the Penn Central of this bear market? Could a psychological low have occurred last week that will prove to be the bottom? Time will tell, but the 400-point Dow rally that split the Lucent and Pacific Gas stories last Thursday must have gotten some of its force from relief that the Lucent rumor was false.
Friday's PG&E news, however, together with weaker employment data, stalled out the rally -- but perhaps only temporarily. The days ahead may see a resumption of the rise -- if only because pessimism had gotten so bad last week.
Rising unemployment, falling corporate profits, large declines in equity values, an energy crisis and rumored and actual corporate bankruptcies all have been piling up on the Fed, as well as with investors. While the measured pace of discount rate reductions gets the headlines, the Fed's open market activities reveal a more urgent attempt to turn the economy away from recession.
Judging from the rapid growth of money supply in the first quarter, it would seem that the Fed also is reaching a psychological low point in this self-induced downturn, and its fear that it may go badly is evident. Money supply, as measured by M2, is growing at a 12% annual rate, the fastest pace of the past decade, and about twice the rate required to sustain normal economic activity.
It would seem that both investor psychology and Fed psychology have moved to the fear stage. Out of fear usually come actions (like panic selling, or rate cutting) that cause market bottoms.
Lets hope this bear market is ending and that it, too, becomes another wrinkle on the 50-year market chart. Meanwhile, let's start focusing on the next big thing: How fast earnings will grow in 2002.
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Tom Kurlak is the former semiconductor industry analyst for Merrill Lynch, now retired. For 19 consecutive years, Kurlak was on the Institutional Investor All Star Team until his departure for Tiger Management in February, 1999. At the time of publication, Kurlak has no positions in any of the holdings mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Although he cannot answer questions about individual securities, he appreciates your feedback at Thomas Kurlak. |
