As an addendum to my last post, the WSJ today had a nice article on the history of market bubbles... Personally, I like the comparison to the 'Nifty Fifty' the best. Everyone thought those stocks were 'rock solid', which could not have been further from the truth as history shows...
Regards,
John
History Suggests a Recovery Is Slow
After Bursting of Speculative Bubble
By E.S. BROWNING
Staff Reporter of THE WALL STREET JOURNAL
Have the froth and excess finally been squeezed out of the stock market?
More than two years after stocks began their painful declines, a look back at previous market bubbles provides a hint as to where shares are headed next.
What history suggests is that, following bubble periods, stocks take time to recover -- more time than has passed so far. By that standard, the broad Standard & Poor's 500-stock index or the Dow Jones Industrial Average may be closer to a lasting recovery. But the tech-dominated Nasdaq may still face a rocky road.
"The way I look at markets is that things generally tend to be symmetrical," says Kevin McClintock, chief investment officer for stocks at money-management firm David L. Babson in Cambridge, Mass. "If you have had a runup that has taken a couple of years, it doesn't tend to correct itself in six months."
The Nasdaq Composite Index, for instance, looks surprisingly like the U.S. stock market around the 1929 crash, or the Japanese stock market during its runup, according to studies by Ned Davis Research in Venice, Fla. It also has behaved similarly to mining stocks during the gold bubble of the late 1970s, while the S&P 500 looks a little like it did in the early 1970s, as the "Nifty 50" bubble was popping.
No one, of course, is forecasting a period like the 1930s, or even a near-depression such as the one Japan has experienced. The look back at history also does nothing to reflect the classic way that most experts evaluate stocks, which is to compare stock prices to companies' earnings.
Last week, amid growing concerns that corporate earnings won't be strong enough to pull stock values higher, stocks continued their four-week slump. The Nasdaq composite fell 0.8% for the week, and the S&P 500 fell 1%. The Dow Jones Industrial Average fell 0.8% to 10190.82, despite a rise of 0.15%, or 14.74 points, Friday.
The Crash of '29
The Nasdaq Composite didn't exist in the 1920s. Electricity and the radio were the networking technology and the Internet of their day, and the Dow Jones Industrial Average was the speculative index.
From April 1921 through the market peak in September 1929, before the October crash, the Dow Jones industrials rose 497%. The Nasdaq Composite, by contrast, rose more than 1,300% from October 1990 through March 2000. Because the industrials were generating more dividends than Nasdaq stocks do, that comparison understates the full gains of the 1920s. Still, the Nasdaq bubble was huge, and it is little wonder that the Nasdaq still is struggling.
"It is going to take some time to get the Nasdaq valuations back to reasonable levels," notes Tim Hayes, Ned Davis's global stock strategist.
Following the 1929 crash, the Dow Jones industrials fell 89% through July 1932. The Nasdaq, at its low, was down 72%.
Does that mean the Nasdaq has further to fall? Not necessarily. The industrial average's troubles were worsened by inept economic and monetary policy in the 1930s. If today's economic managers prove better -- and if the terrorist threat doesn't worsen -- the Nasdaq could fare better. Mr. Hayes's best guess: "They don't have to go down any farther than they are," but the index could have trouble making significant progress anytime soon.
The Tokyo Bubble
If the Nasdaq of the 1920s was the Dow Jones industrials, the Nasdaq of the 1980s was Tokyo's Nikkei Stock Average. Amid a spasm of real-estate and stock-market speculation, the Nikkei rose 468% during its bubble, which ended at the close of 1989, just before the U.S. bull market got under way. Since then, the Nikkei has collapsed, losing three-quarters of its value.
If the Nasdaq were to behave like the Nikkei, that would mean that it has a long and grueling period of further decline ahead of it; the Nikkei continued to fall from the start of 1990 through this year, a period of more than a decade.
Here, again, however, the outlook may not be that grim. The Japanese government's effort to prop up companies and banks threw the country into a series of recessions that some economists have characterized as a near-depression. While few analysts think the Nasdaq decline needs to last as long as the Nikkei's, the Japanese experience doesn't help the case for a quick Nasdaq rebound.
In the late 1970s, with inflation soaring and the economy uncertain, investors became fixated on one of the oldest speculative investments: gold.
As the Hunt family made its infamous attempt to corner the silver market, gold prices surged. "The mania that occurred in the gold market sent it up to $800 an ounce. It was one of those rare, 1929-style events," notes Mr. Hayes of Ned Davis.
The rise and fall of gold-mining stocks during that period looks surprisingly like that of the Nasdaq. The experience with gold offers a measure of hope, but also some concern.
The good news is that the gold-mining stocks bottomed out at a point in their cycle similar to the recent Nasdaq bottom, which suggests that maybe the Nasdaq index can escape any further decline. The bad news is that gold-mining stocks never returned to their high of 1980.
Of course, a bar of gold is a lot different than a computer chip. "The Nasdaq composite might not have to wait as long as the gold-mining stocks did for a new high, but there still is a strong case to be made that it could be a long time before we go back to new highs" on the Nasdaq, Mr. Hayes says.
Something very similar to the bubble of the 1990s occurred in the early 1970s, with what was known as the Nifty 50 stocks, as investors shifted more and more of their money to a small group of solid, powerful companies such as American Express, Avon and Polaroid -- the Ciscos, Oracles and Microsofts of their day.
Those stocks soared, and they became known as "one-decision stocks." All you had to do was buy and hold; they would be good forever.
Their unraveling in 1972 and 1973 brought down the S&P 500 and led to one of the most frustrating periods for stocks since the 1930s. Although stock indexes alternately soared and plunged during the rest of the 1970s, they didn't make any lasting progress until 1982.
There is every reason to think the S&P 500 will do better now than in the 1970s. This time, there are worries about stock valuations, earnings and terrorism. Back then, on top of valuation and earnings issues, there was terrible inflation, anguish over the Vietnam War and disaffection with the White House, the military and American society. Things are better today.
Stock strategist Tobias Levkovich of Salomon Smith Barney believes investors still have inflated hopes for tech stocks. He notes that, while tech companies make up 3% of employment, 4% of the nation's total output and 7% of industrial production, they represent more than half of stock-trading volume.
As has been the case with other fallen darlings after their bubbles, tech stocks could be facing a series of lurching ups and downs, as hopes spring up and are dashed. The roller coaster could last until excessive expectations for tech stocks finally get washed out.
"And that could mean that some of the shakeout of the tech bubble isn't done," Mr. Levkovich says. |
