Bear markets usually take people by surprise. Read the following and see if you can reach the end without shuddering... I couldn't.
Enjoy!
[Kiplinger OnLine]
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October 1997
Reality Check: A Diary of a Bear Market By Robert Frick
The second-worst market slide of this century began almost 25
years ago and lasted nearly two years. Did we learn anything from
it?
The stock market should go higher still because "prosperity is
almost certain to continue," reports Business Week. Fortune says
it's "hard to imagine a combination of circumstances that would
entirely undo the good work of the past few years, which halved
the inflation rate from roughly 6% three years ago to about 3%
now." Equally sanguine is Robert Wade, director of research for
the Wall Street firm of Burnham & Co., who says that the Walt
Disney Co. remains a good value even though it's priced at 70
times earnings. "Disney typifies what a growth stock should be,"
says Wade. "It has a unique image and franchise. It makes people
happy."
It's December 1972. The Dow Jones industrial average hovers at a
lofty 1000. H. Ross Perot is a big player on Wall Street. Super
Bowl tickets go for $15.
And you stand on the precipice of one of this century's worst
bear markets, second only to the tumble that kicked off the Great
Depression. You'll read and hear a lot this October about the
ten-year anniversary of the 1987 crash. But a short trip down
memory lane to when the wheels of finance really flew off
provides a better reality check. The sickening, 44% slide in the
Dow that began on Friday, January 12, 1973, was agonizingly drawn
out, sapping everyone's patience and will.
In reviewing what was said and what was done then, some timeless
lessons emerge about the stock market and the economy--not to
mention a few timely comparisons to events of 1997.
1973 January 11 (Dow, 1052)
A great day to own stocks. Investors, feeding on the strong
economy, push the Dow up more than five and a half points, to an
all-time high of 1052.
Optimism abounds. "As time goes on, the economy is becoming less
and less vulnerable to big booms and big busts," says L.O.
Hooper, of the W.E. Hutton & Co. brokerage, in the current
Forbes. "Competent economists, constantly more influential in
government and in money management, are doing more and more to
keep trends in control."
For some time, it has seemed as if there were two stock markets:
a favored few stocks and all the rest. A handful of blue chips
referred to as the Nifty Fifty lead the way. Among them are
McDonald's--at $74, it's selling for a staggering 83 times its
earnings per share for the previous 12 months. Avon is at $133
(with a price-earnings ratio of 63). Eastman Kodak commands $148
(P/E, 47), Coca-Cola is $148 (47) and IBM is $415 (38). These are
all steadily growing companies, and the thinking is that they
deserve the high P/Es because their potential for growth seems
limitless.
A few people are appalled at valuations for the Nifty Fifty. One
of them is John Neff, the veteran value investor who runs Windsor
fund. "The whole growth-stock-multiple fad is crazy," Neff tells
Forbes. "People are just buying quality companies at any price
and hanging on forever. I bought McDonald's at a P/E of 16 and
sold it at a P/E of 25." Now look at the stock, he says. "This is
sheer fantasy."
January 12 (Dow, 1039)
Business and labor leaders aren't sure they understand President
Nixon's Phase 3 economic program completely, but most of them
love it just the same--and see it as an invitation to jack up
prices and raise wage demands. Eighteen months earlier, Nixon
froze wages and prices. Then he established guidelines and a
bureaucracy to permit gradual increases. Now, in Phase 3, those
guidelines are being made largely voluntary. Many think economic
controls simply delayed price hikes. Hendrik Houthakker, a
professor of economics at Harvard and a former member of Nixon's
Council of Economic Advisers, observes: "What we have now is a
failure, so any change is better."
Evidence of the failure comes in a government report today that
wholesale prices in December rose at an annualized rate of 19%
and food prices at an annualized rate of more than 60%.
Reflecting unease over the loosened wage-and-price guidelines,
the Dow retreats 13 points from its high.
January 17 (Dow, 1029)
A private economist by the name of Alan Greenspan is already
demonstrating his way with words: "The danger is that business
may get too good too soon. Up to now there has been a strong
element of business and consumer caution that has helped to keep
the recovery under control. There are signs, though, that the
caution is diminishing."
January 23 (Dow, 1019)
The President declares, "We have today concluded an agreement to
end the war and bring peace with honor in Vietnam and Southeast
Asia." The market, apparently unimpressed, drops 14 points.
January 31 (Dow, 999)
Inflation is worrisome. Stocks decline again, breaking the 1000
mark. President Nixon's Council of Economic Advisers predicts
that the rate of inflation in 1973 will be held to 3%. (The
actual rate will approach 9% by year-end.)
March 31 (Dow, 951)
Stocks are being whipsawed. In one recent week, the Dow has
dropped 40 points and losers outstrip winners by 50 to 1. The
next week, it rallies 25 points in three days after Federal
Reserve Board chairman Arthur Burns twists some arms to keep the
banks' prime lending rate to 6.5%, instead of the 6.75% that
bankers wanted.
The market is now off nearly 10% from the January high, and the
rise in interest rates has started to hurt. Business Week lays
much of the blame at the Fed's feet. The magazine points out that
after letting the money supply grow by 8% in 1972, the Fed is
clamping down on the growth of money to quash inflation. Scarce
money means higher interest rates, and this hinders economic
growth.
April 12 (Dow, 964)
An ominous sign: The annual dinner of the New York chapter of the
National Security Traders Association on April 27 will be "dress
optional," reversing a black-tie tradition. A spokesman explains
that business is so bad in the securities industry that the group
figured many would not want to part with $14 to rent a tuxedo.
April 30 (Dow, 921)
Greenspan writes in the Wall Street Journal: "Controls can't stem
inflation, only fiscal and monetary policy can." Something had
better, because predictions of declining corporate profits, as
well as inflation and higher interest rates, continue to subdue
the market.
May 14 (Dow, 910)
The slump approaches the 15% mark, but hope springs eternal.
Kidder Peabody economist Sam Nakagama says he doesn't see a
recession ahead: Inflation will cool, there won't be a credit
crunch, corporations' earnings will continue to climb, and the
stock market will "rise to reflect these favorable developments."
Is he whistling in the wind?
May 18 (Dow, 895)
The National Bureau of Economic Research, a nonprofit
organization, predicts that a recession is just around the
corner.
May 26 (Dow, 931)
The struggles of H. Ross Perot--described by Business Week as
"the diminutive computer-service magnate from Dallas"--typify the
strains on the brokerage industry, whose business has slumped.
Perot has owned the Wall Street brokerage of duPont Glore Forgan
for two years. Signs of his presence are everywhere in the firm's
offices, including this quotation: "The cowards never started,
the weak died on the way . . . only the strong survived."
June 5 (Dow, 901)
Treasury Secretary George Shultz says the prolonged stock-market
slump puzzles him. Shultz insists that there are "bargains
galore" to be had in the stock market now. "I almost wish I
weren't in my present position so I could get my hands on some
money and invest it," he laments to a congressional committee.
June 7 (Dow, 910)
A curious new type of mutual fund debuts, based on the
disappointment investors feel when their professional money
manager can't beat the market averages. Says the Wall Street
Journal: "It isn't expected that the new-style portfolios, dubbed
'index funds,' will get a lion's share of the institutional
market any time soon. The notion that the market can be 'beaten'
is too deeply entrenched for that to happen."
June 9 (Dow, 920)
"Fresh lobster meat hit $10 a pound in New York last week, a head
of lettuce cost 79 cents and a Manhattan advertising executive
moaned that his wife was spending $200 a week to feed their
family of seven," Business Week says. Consumer prices rose at an
8.8% annualized rate in the first quarter of 1973.
June 14 (Dow, 903)
President Nixon orders prices frozen for up to 60 days as a
tighter system of wage-price controls is created. Newspapers
report that the reaction of businessmen, bankers and economists
ranges from apathy to outright criticism.
June 30 (Dow, 892)
The Nifty Fifty aren't so nifty anymore. The glamour stocks among
them are getting creamed. McDonald's share price is in a free
fall--dropping to $56 from its 1973 high of $77--but its P/E
ratio is still a lofty 54. Disney, which sold for 70 times
earnings last December, is trading for 51 times earnings now.
August 22 (Dow, 852)
Nixon, in his first news conference in over five months, says he
accepts all the blame for the Watergate scandal, but won't resign
and has never considered doing so.
September 22 (Dow, 928)
In the first six months of 1973, more than 300 stock offerings
were withdrawn as unsalable. Concludes Business Week: "The stream
of equity capital to U.S. industry has run dry."
September 24 (Dow, 937)
The government reports that consumer prices in August exploded at
an annualized rate of 22.8%, the steepest monthly ascent in
almost 26 years.
Despite that, the market is coming back, up 10% from its August
low. Some begin to think the worst is over.
October 1 (Dow, 949)
Some experts are putting on a happy face again. Writes Myron
Simons, director of research at brokerage Wooden & Co., in
Forbes: "The market . . . has hardly reflected at all the growth
in earnings and in investment that has taken place in the past
decade. Since we have probably seen the worst of our inflation
with last month's staggering increase, it's time to turn
bullish."
October 6 (Dow, 971)
War breaks out in the Middle East between Israel and its foes.
The press reports that corporate executives don't believe there
will be more than a token cutoff of oil to the U.S. because of
its support of Israel. Government spokesmen try to dispel rumors
of an imminent fuel crisis as a result of Arab attempts to form a
joint oil policy.
October 11 (Dow, 976)
Vice-President Agnew resigns. He cops a plea to income-tax
evasion. The Justice Department is preparing to bring charges of
bribery and extortion.
October 19 (Dow, 964)
Several oil-exporting nations of the Middle East cut off exports.
By December the price of oil will rocket to between $14 and $19 a
barrel, up from $2 to $3 a barrel a year earlier. Even so, the
stock market holds firm. In a week the Dow will again be nudging
1000.
November 15 (Dow, 875)
The oil situation is now a crisis, generating fears of higher
inflation and fuel shortages. And stock prices are cracking--the
Dow is down 100 points in three weeks. The Wall Street Journal
notes that for the first time since World War II, when German U-
boats prowled the New England coast, the capitol domes of
Connecticut, New Hampshire, Rhode Island and Vermont are dark at
night--this time to save electricity.
December 15 (Dow, 816)
The Securities Industry Association, the brokerage industry's
trade group, buys newspaper ads to boost investor confidence.
One shows an investor saying, "Sure, I've got some stocks that
have dropped this year. But I've got one that's grown 30% or 40%,
so it's carrying the others. There's money to be made, even in a
down market."
December 22 (Dow, 819)
Ouch. The broad-based Value Line index has fallen 25% in just two
months. The 30 stocks in the Dow Jones industrials are trading at
their lowest P/E in 20 years, says Business Week. "Nor is there
any evidence that the market has yet hit bottom--or any solid
clue as to when it will. Stock-market investors will have to play
1974 by ear."
1974 January 14 (Dow, 840)
There's no consensuson what the new year will bring. Analysts
can't seem to agree on anything, and they load down their
predictions with qualifications. Says Barron's columnist Alan
Abelson: "Never have so many said so much to such little
purpose." But can you blame them? The oil cutoff is having
profound economic effects, but how deep it will cut into the
country's industrial muscle is unknown. The sight of cars lined
up for blocks waiting to buy even a few gallons of gasoline is
unsettling. The desire of investors to buy stocks seems to be
drying up with each trip to the pump.
January 17 (Dow, 872)
Although the economy is weakening on several fronts and interest
rates continue to climb, some pundits and economic experts see a
silver lining.
Says Fortune magazine in its January issue: "Despite the oil
crisis, and despite the worries about severe recession, economic
growth over the next 18 months as a whole will about match that
of the past 18--7%."
In fact, the economy is already in a recession, having done an
impressive about-face at the end of 1973, when the economic
growth rate was a torrid 5.7%. This year and next, the economy
will drop into a steep recession while inflation roars.
January 22 (Dow, 863)
Small investors, it turns out, knew what they were doing by
staying away from the market in 1973. By sticking to investments
such as Treasury bills and bank certificates of deposit with
maturities of less than a year, they earned 8%, versus a loss of
15% in the stock market, the Wall Street Journal reports.
January 26 (Dow, 859)
H. Ross Perot proves himself one of "the weak." After injecting a
chunk of his personal fortune into duPont Glore Forgan to no
avail, he puts the brokerage--the second-biggest Wall Street name
after Merrill Lynch--up for sale.
April 14 (Dow, 845)
An editorial in the Wall Street Journal sums up the growing
economic and market mess: "The Dow Jones average has recently
been hovering around 850. It first reached that level in 1964,
which means that an investor with average timing and luck has had
no gain for a decade. . . . The immediate problem is high
interest rates. With corporate bonds yielding 8% or even 9% .
common stock indeed."
June 15 (Dow, 843)
The big-name, high-priced stocks continue their long fall to
earth, accompanied by yet more wishful thinking that the worst
has passed. A Business Week article asks the question, "Time to
buy the glamour stocks?" Avon has fallen from its 1973 high of
$140 to $51 with a current P/E of 22. Coca-Cola has slid from
$150 to $115, with a P/E of 31. But the bargain basement is still
several floors down.
June 29 (Dow, 802)
At midyear, anyone with courage admits that nobody knows what's
going on or what will happen next. Says Business Week:
"Economists will remember 1974 for many things: for the squeeze
on energy, for the breathtaking rise in prices and perhaps for
events yet to come. But mainly they will remember 1974 as the
year the forecasters blew it."
July 2 (Dow, 791)
The Dow falls below the 800 mark. Interest and inflation rates
are up, profits down. An air of resignation settles over Wall
Street. "The markets now reflect the possibility of a major
financial crisis," says Business Week. "Rates on CDs and
commercial paper are now so high that even when they do finally
start to come down, they will still be extraordinarily attractive
in comparison with sickly bonds and hazardous stocks."
August 9 (Dow, 777)
Nixon resigns. New President Gerald Ford vows to make fighting
inflation a top priority. "In many ways," writes Alan Abelson of
Barron's that week, "Mr. Ford strikes us as extremely lucky. . .
. There's nowhere to go but up." But the stock market is
indifferent to the resolution of the Watergate crisis.
August 23 (Dow, 687)
Kodak drops four points. Other blue chips take similar hits. The
Dow has plunged 110 points during the past 12 trading days as
recession, inflation and high interest rates pound the life out
of the Nifty Fifty. Coke, IBM and Kodak have dropped about 50%
from their 1973 highs. McDonald's is down 60%.
September 2 (Dow, 679)
despair abounds. A Newsweek article ("Is There No Bottom?")
asserts: "The plain fact is that there is simply not enough good
economic news to sustain a real market comeback."
October 1 (Dow, 605)
Capitulation. A story in Fortune titled "A Case for Gloom About
Stocks" lays the blame for the bear market on inflation and says
the fall might not be finished. In the course of a few months the
anticipated rate of inflation for 1974 has risen from 5% to 8%
and new projections are coming in even higher. The prime lending
rate of banks stands at a prohibitive 12%, and rumors circulate
on Wall Street that another Arab oil embargo is in the works.
Fortune sees more gloom and doom ahead--this from the magazine
that less than two years earlier had proclaimed, "The flush of
robust prosperity is suffusing the economy."
October 4 (Dow, 585)
Another down day--the 11th in a row. In the past three sessions,
the Dow industrials sank below the 600 level. Now there seems to
be no bottom, and the sense of defeat on Wall Street is almost
palpable. Word on the floor of the New York Stock Exchange is
that some institutional stock portfolios are for sale in their
entirety.
But Friday, October 4, becomes, figuratively speaking, the last
down day. On Monday the Dow will rebound smartly, and go up again
on four of the next five days. The bear market of 1973-74 is
over, 21 months after it began. At 585, the Dow industrial
average is off 44% and won't regain the 1051 level set on January
11, 1973, for another eight years.
And all around lies the wreckage left by the financial storm.
You can buy McDonald's for $21 (down 72% since January 11, 1973)
and Coke for $46 (down 69%). If Disney was a good value when its
P/E stood at 70, today it's a steal at only 13 times earnings.
Avon, down 85%, saw its P/E plop from 63 to 9.
No longer will investors refer to such stocks as the Nifty Fifty.
For that matter, a lot of people will never dip their toe in the
stock market again, and those who do stay in will bear invisible
scars from this experience for decades.
Reporter: Alistair Barr |
