for all the naysayers and market doom and gloomers heres a nice article on why you should be getting back in the market at this time.
Recession? What Recession?
A Fool's Eye View
By David Gardner
January 4, 2001
If a Fool exists to counter conventional
wisdom, I have a few things to say to my
fellow investors as we enter this New Year
of 2001. But the gravamen is this:
"Recession" is defined as a decline in
real gross domestic product for two
consecutive quarters. Many people out
there today who are tossing around "that
'R' word" are not doing so with a clear
sense of what it actually means. The result
is that we're probably dampening our
consumer confidence, and some of us are almost certainly walking
into some regrettable investment mistakes. Because that word
"recession," when it sits out there both ubiquitous and undefined,
drifts in the air like some mutant virus infecting many among those
least educated or prepared. And their tendency may well be to cash
out their retirement plan, or at least not roll it over, because of a
generally mistaken view that recessions mean bad investing times
ahead.
Do you agree with me that most people can't define "recession"? Next
time you hear the word -- any time you hear the word -- quiz the
speaker. Go ahead. Just say, "Well, Mike... and how do you define
'recession,' exactly?"
You'll discover that the majority of Americans who are hearing that
term from the media (and in some cases adopting it themselves)
haven't a specific idea of how to measure a recession, or of how to
measure (conversely) a boom. They lack the yardstick; they were
probably never handed it, nor previously motivated to seek it. And
you'll discover further that even many in the media themselves don't
know how their buzzword is actually defined by the economists
(whence the popular term emanates). Again, read the real definition
above, set appropriately in bold.
What results from this sad miscommunicating looks something like a
wide theater, with murmurs everywhere in the crowd, its darkened
patrons all with their eyes now trained on what turns out to be, itself,
a darkened stage. And all around in the air, overhanging, a festering
pessimism (I want to Spoonerize "pestering fessimism").
And a helplessness. And a muddle of mingled maundering voices,
"Recession, recession, recession."
These themes play particularly well into a time of year that features
colder temperatures, stressful holidays, and airport delays. And
further, a natural human resolve to buckle down, to hibernate and
nest during a "recessive" season of the year. Consider also that the
Nasdaq has dropped nearly 50% since March, and you have a perfect
formula for conventional wisdom to say, "Stay the heck away. Don't
invest. Wait for a better day." Or even: "The market is going to get
killed!"
The market has already been fairly well shot up, so I wouldn't worry
too much more about that. Indeed, about now looks like a great time
to invest. "Recession" or no.
In fact, using the National Bureau of Economic Research's definition of
recession we led off with, let's look at the five true recessions we've
had in my lifetime (I was born in 1966):
4Q '69 - 1Q '70
3Q '74 - 1Q '75
2Q '80 - 3Q '80
4Q '81 - 1Q '82
3Q '90 - 1Q '91
Notice three things. Notice that it's happened five times in thirty-four
years, which means we recess on average once every seven years.
Second, notice that we haven't had a recession in 10 years. Third,
notice that none of these recessions is particularly prolonged.
Now let's look at our own rate of growth of real gross domestic
product over the past four quarters:
4Q '99: 8.3%
1Q '00: 4.8%
2Q '00: 5.6%
3Q '00: 2.2%
We see a clear deceleration in growth, but we do not see any
negative numbers, there. Yet. I'll just add that numbers over 5% are
not going to be sustainable year in and year out.
So now you have some context for how frequently real recessions
occur, and what our own real growth rates have actually been. Now
let's focus on the stock market in these periods, taking the two worst
extended declines during those recessions. The second worst was
from November 1980 to July 1982, when the S&P 500's monthly
average went from 136 to 109 -- that's a drop of 20%. Feels a lot like
the last year, actually. Worse -- worst of all, in fact -- was from
January 1973 to September 1974, when the S&P 500 dropped from a
monthly average high of 118 to a monthly average low of 68. That's a
drop of 42%, and that ain't no dot-com dot-bomb thing, that's 500 of
the bluest chips in America surrendering about half their value at the
time.
Over the course of the last 10 months, the S&P 500 has lost about
8% from its monthly average of around 1460 in March down to its
present level of around 1345 today. But the Nasdaq, with many of our
highest-capitalized companies in our biggest growth sectors, has
suffered an unsightly flattening of almost 50% (even
after Wednesday's rally). Meaning we've done most of our penance.
Now let me pick two numbers from above and point out their
interrelatedness: The market's big decline of 42% in 1973-74
concluded in September 1974, which just so happens to have
been the beginning of the recession that ran from 3Q '74 to 1Q
'75.
I see at least a fair argument that even if we do enter a recession in
2001, much or most of the market damage will already have occurred.
Also, consider the economic environment of 1973-74, compared to
today. The inflation rate in 1973 was 9%, and in 1974, 12%.
Remember how that felt, to see your stocks lose 40% of their value
while your money itself is surrendering 10% of its value! Meanwhile,
our inflation in 2000 was 3%, and as a nation we're far more clearly
the technology and business leader of the world than we were in
1973-74.
When you add it all up, I think the message is clear: You and I should
be getting EXCITED about the present environment for stocks, if
we're long-term investors. It's going to be a lot easier, for instance,
to find good values in this year's Rule Breaker seminar than last year's
just because market conditions appear to be (fleetingly) so terribly
unfavorable to growth stocks. But while conventional wisdom may
wish to hibernate from a market that seems cruel and unforgiving, I
would like to suggest Foolishly that this is an outstanding time to be
dollar-cost averaging that regular portion of your paycheck into the
market.
Am I saying that a rising tide will lift all boats? I truly hope not. Part
of the reason that market sentiment and performance are so weak is
that for some reason companies like Pets.com (Nasdaq: IPET) and
DrKoop.com (Nasdaq: KOOP) and even supposed juggernauts like
CMGI (Nasdaq: CMGI) were accorded grotesquely high multiples of
sales. It was an environment where investors seemed willing to pay
Ace of Spades prices for the privilege of owning the Three of Clubs. (I
still think Amazon.com is a "face card" business, even though it's not
yet profitable, but of all my companies that's the one with highest risk
-- though with incredibly high brand recognition.) Again, I truly hope
that the market (that's all of us) has learned not to overvalue
third-tier players come the next market recovery.
But the world's most promising companies are now on sale, with 60%
cut-rate prices from what we saw just a year ago. That is a cause
for optimism, not "blood on the streets" analogies and fear mongering.
My own pet project is our coming Rule Breaker seminar, where I look
forward to working with many of you to find the Breakers, eschew the
Fakers, and fulfill our Motley Fool aim of Learning Together.
I look forward to many more great years to invest, and wish you the
very best with all your investing. I hope The Motley Fool will be
increasingly relevant and helpful to you with all your financial needs.
To all of you and yours, a very Happy New Year!
David Gardner, January 4, 2001 |
