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Where are we now?
Month after month, since late March of last year, we have all watched the market grind itself downward, almost relentlessly. Various "talking heads" have prognosticated, first that a rally was around the corner somewhere, and then, that the economy was going to the dogs. The Federal Reserve, and Alan Greenspan in particular, has alternatively - and momentarily - been labeled as either the hero or the villain of the hour. And in the background there has always been someone muttering the phrase, "Bear Market..."
I've never been entirely comfortable with the term "Bear Market." This term frequently is used to describe a variety of different events, and it also carries strong emotional baggage. However, over the last year, we have been hit by a deep and continued market decline, accompanied by growing pessimism and uncertainty. From here, this looks like the proverbial "Bear Market...."
Generally a "Bear Market" is defined as being a greater than 20% decline in the general market, as measured by one or more of the major indices. Although these never seem to take place in exactly the same way, they generally share additional common characteristics:
Historically, "Bear Markets" cover an extended period of time as they tend to take a while to work themselves out - they are not over and done with very quickly. However, since 1982 there have been three market sell-offs that share some, but not all, of these characteristics.
"Bear Markets" frequently end with a bang - a final wave of what is sometimes called "capitulation selling," when a significant percentage of investors simply throw in the towel. As a result, the most significant price declines in such a sell-off frequently occur right at the end of the cycle.
These climactic sell-offs are often accompanied by extreme pessimism, among both investors and the population at large. The news media frequently covers these market sell-offs in very dramatic terms, making them appear to have broader social and economic consequences than they actually do. The perceived threat of job loss often has a wider impact than do the actual job losses themselves.
These sell-offs are almost always followed by a period of uncertainty in the market, since investor confidence is severely shaken. Sometimes, the market will seem to rebound quickly, but invariably this bounce is quickly followed by a loss of momentum, and the market may even fall back again to the lows that it first hit a month or two earlier. It appears that investors need a period of time in which to digest events before the market can return to its earlier course.
We have seen such market declines before - but not in the last 25 years. As a result, this is a new experience for a lot of us, and those of us who have been through one or more of these in the past have forgotten how they normally run their course. To help bring this event into perspective, I've assembled "thumbnail sketches" of the major market sell-offs since the late 1960's, complete with charts.
These "sketches" and charts show that the last market decline that met all of the criteria for "Beardom" took place in 1973 and 1974. Subsequent declines have been too brief to produce real "fear and loathing" among investors. As a result, they have sometimes lacked a climactic sell-off, their subsequent "periods of uncertainty" have been shorter, and the subsequent recovery has come more quickly. However, the 2000-2001 market decline will probably come to more closely resemble those of 1968-1970 and 1973-1974.
Realistically, at this time, the largest part of the NASDAQ Composite sell-off is undoubtedly over. It is clear that we are closer to the bottom of that decline than we are to its top. However, there are still a lot of unanswerable questions today.
First - will this market decline spread to the non-"hi tech" segments?
Yes - a week ago it appeared that this had begun to take place, but tonight it is definite! The S&P indices were not affected in the initial phases of this decline. But the S&P 500 began to track downwards after September 1, 2000, and the MidCap 400 and the SmallCap 600 have begun to follow this trend. In fact, it can be argued that the MidCap 400 is on the brink of "Bear country" as of tonight's close.
Next - are we now in the "capitulation selling" phase of this decline?
Tonight it is clear that we are well into this phase. The NASDAQ Composite sell-off seems to have accelerated recently, and we are now seeing a sell-off in the S&P indices. The S&P 500 has finally fallen into "Bear Market" territory, having dropped more than 27% over the last year, and it can be argued that the MidCap 400 is on the brink of "Bear country" as of tonight's close. The SmallCap 600 is still some distance from a 20% decline off of its highs but its rate of decline seem to be accelerating.
And - how quickly and how strongly will the market rebound?
This is the "big question"...but the answers are still a little "small." Based on history, I suspect that we will see a market rebound within three months of a bottom, but the long-term strength of the market will undoubtedly be driven by economic and business fundamentals.
It is clear now that additional FOMC interest rate reductions will do little, by themselves, to move the market upward, and I'm uncertain of their real impact on the overall economy. However, the proposed tax cuts may generate some immediate stimulus in the months after they are implemented; I am beginning to suspect that one impact of the U.S. Federal deficit reduction has been to pull liquidity and "spending" out of the domestic economy, which, in turn, may be an underlying cause of the current economic slowdown. More on this later...
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NOTICE
This analysis is based on publicly-available information, and is in no way warranted by me as to accuracy or completeness. I do not guarantee to advise you as to any change in this information |
