Good article on bear market correction by Ken Fisher in Forbes
forbes.com
Bear Market Corrections
Kenneth L. Fisher, Forbes Magazine, 06.11.01, 12:00 AM ET
Is it a new bull market? No. The rally that kicked off Apr. 4 inspired widespread talk
that the bear market is over and a new bull market has begun. The market's
sideways move in May has done nothing to dispel that. Why don't I think we've
seen the bottom? The spring rally has just about all the signs of a classic correction
within a bear market.
The most significant sign: As stocks soared for a straight month, long bonds simply
tanked. This doesn't happen at real bear market bottoms. It happens often during
bear market corrections, which are temporary and misleading.
At real bottoms, when stocks start to rise, bonds rise, too. Stock and bond prices
sure don't head in opposite directions. At times they are very, very highly
correlated, as they were during the 1970 and 1990 bottoms. Other bottoms aren't
so highly correlated, but they still move in the same basic direction, as in 1966,
1974, 1982 and 1987.
The only modern exception is 1962. But that was more the result of a foreign policy
crisis-Soviet missiles in Cuba and a possible nuclear war-than the playing out of a
normal, long economic and sentiment-oriented bear market, such as we've seen
lately.
Why is a stock market bottom so linked to bonds? A new bull market in stocks is
confirmed by bond prices because they compete so directly against each other for
investor dollars-just as water quickly seeks its own level. When investors are
optimistic, there's plenty of money available for buying both equities and bonds. In a
bear market correction folks often shift money from bonds to stocks to catch the
ride. That doesn't endure for long.
Here's another way to think of it. After genuine bottoms both bond yields and
earnings yields go down. A declining bond yield, of course, is synonymous with a
rising bond price. The earnings yield on a stock is the inverse of the P/E, and it goes
down as the stock price rises. Unless real, net new liquidity pushes down both of
these long-term yields, you won't get a new bull market.
This spring's correction has reversed all the psychological damage of the market's
last major slide, re-buoying sentiment to its December levels. That is what
corrections are all about. But just as bull market corrections are short and
deceptively scary, bear market corrections are short and deceptively reassuring.
You know it is a sucker's rally when the mass of journalists tells you to buy into it.
Journalists are more sanguine now. You can see this on the June cover of
Kiplinger's Personal Finance, with its screaming headlines "Bye-Bye Bear" and
"Sweet Ways to Make Money Now," along with a picture of a honey pot and bees.
Egads! Don't they know? Honey pots attract bears.
This is not the stuff of bear market bottoms. At real bear market bottoms most
journalists disbelieve for many months thereafter. They've become convinced by
the downdraft's power that no real good can come to equities for a very long time.
At bear market bottoms you always have at least two despairing magazine cover
stories on the "death of equities." So far we haven't had any.
In my 1987 book I described a simple formula for predicting a market bottom. You
don't apply it until there is a real bear market, defined as 20% or bigger declines in
the major stock market indexes. After this point is reached, wait until unemployment
has risen one full percentage point from its low point before you call a market
bottom.
We've had the 20% corrections: By the end of March the S&P 500, the Wilshire
5000 and Nasdaq were all off 20% or more from their highs. Unemployment was at
its nadir of 3.9% last October. This April it hit 4.5%. Hence, we have another full
four-tenths of a point to go. That will probably take until about September. And that
means we face at least one more down leg in the bear market.
Note that rising unemployment will continue well beyond the bottoming of stock
prices as it most normally does. Since we are well short of a market bottom, I
expect layoffs to continue. They began in technology in January and February,
rippled into other industries in March, and in April and May spread beyond America
to the world.
As I wrote in my Mar. 19 column, the best single road map to this market is the
1980-82 bear market. Look at its corrections in 1981's fourth quarter and in 1982's
second quarter. That is where we are right now. Prepare for the next downdraft.
Stay maximally defensive.
Kenneth L. Fisher is a Woodside,Calif.-based money manager. Find past columns
at www.forbes.com/fisher. |
