Where, oh when, will we find the bottom?!
June 8, 2002
Well, just as I was about to finally write a missive to reflect the latest drama in our financial markets, I read a piece in Barron's from the venerable Alan Abelson (June 8, 2002) that reflects enough of what I wanted to say. I follow his piece up with some closing remarks couched in some market history...
The stock market has been in the pits. We're not exactly breaking news here. But Bridgewater Associates points out just how deep in the pits the market is: since the Fed first started easing, stock prices are down 20%. Normally, 18 months after the Fed relaxes, the market up is up 20%. The only time share prices have been down this long after the onset of Fed ease was 1930.
Lots of things have been weighing on the market and most are all too evident: Terrorism, of course. The tinderbox relations between India and Pakistan and the only slightly less incendiary ones between Israel and the Palestinians. The softness in the dollar, that's tangibly affecting foreign investment here. The absence of the corporate buyer.
And, to do what journalists are exceptionally good at, namely stating the obvious, there's the economy. Yes, we've got a recovery. No, it's not the one we were promised, certainly not by the professional cheerleaders on Wall Street's payroll.
In particular, profits, by any measure, except in comparison with last year's, remain slack. And ditto jobs, as evidenced again in last Friday's employment report. Although the unemployment rate was off a couple of notches to 5.8%, payrolls increased a paltry 41,000. And don't bet on even that modest number. April's rise, originally 43,000, was revised down to a mere 6,000, while even bigger shrinkages slashed previous gains for both February and March.
Why is it when the market was booming through the '90s, the standard wisdom was that it was a great forecaster of the economy, but when the market acts like something the cat dragged in -- as it has for a good part of the past two years -- it's no longer a very good, much less great, forecaster of the economy?
Just for the record, we never bought into the high predictive notion during the bubble years and we don't expect the economy to roll over anytime soon. But that doesn't mean the stock market wasn't saying something about the economy then and isn't saying something about the economy now.
What is eating most at the market, though, is epitomized by Tyco, but scarcely restricted to that particular mess. Corporate America and, conspicuously, many of the men who run it, the accountants and the investment bankers who serve it, and the analysts who are supposed to judge it, are under the gun. It's a cyclical phenomenon and the rents in the system are serious but not irreparable.
However, investors in droves feel traduced, and not without cause. And so they've adopted the sage advice rendered by J.P. Morgan: Never do business with anyone you can't trust. And, until they have reason to discard that profound wariness, they'll continue to give Wall Street wide berth. In the event, the stock market may enjoy some occasional respite in the form of a short, even brisk rally, but anyone hoping for much beyond that is doomed to disappointment.
As old J.P. also would likely tell you, trust isn't built -- and, for sure, not rebuilt -- in a day.
So FINALLY I read someone note the oddity in market analysis that says the market is forward-looking only when it is rising. Actually, only knucklehead stock cheerleaders make this ridiculous claim. More astute thinkers know that when the market is persistently weak, it too is a warning....
And persistently weak the market has been indeed. Don't be fooled by those claiming that last week's massive sell-off represents a possible bottom, the capitulation that marks the final shake-out of the sellers. Instead, note just how many people are STILL afraid of missing the next rally rather than scared of having their money further go up in flames.
Now, given that the market has not been this weak following the beginning of a Fed easing since the Great Depression, I thought it would be interesting to go back and review some of my market history. Let's start with a look at how much we have given back to the last great bull market and then end with some chart-reading during the Great Depression itself.
As you know the poor DOW remained pretty flat throughout the 70s. In fact, I think it ended 1981 exactly where it was in the late 60s. Now consider this, the DOW was about 1000 at the beginning of the last bull market in 1982. From there through 1999 the DOWs ramp looks exponential, just like the NASDAQ before it crashed heavily. In less than 20 years, the index rose over 10 times in value, with a few bumps along the way of course. Since 1999, the DOW has essentially gone nowhere but is clearly in a very slow downtrend. Now the NASDAQ, the haven for technology stocks, has done a lot more correcting than the DOW. It had a similar ramp to the DOW, but rising about 20 times in value from 1982 to 2000 (from about 250 to 5000). At about 1500, the NASDAQ is now "only" 6 times the value it was in 1982. All this is of course just a bunch of chart-reading and light correlation (sorta like the numerology of finance), but it *does* suggest to me that the Dow, and likely the S&P, have a whole lot of pain ahead than I care to imagine if the market's weakness persists. This pain should be relatively more severe than the NASDAQ's.
The stock crash of the Great Depression offers a great lesson in the near-futility of trying to call a bottom in the market after a bubble has popped. Check out these numbers:
1923. DOW begins @ 86
Sept, 1929. DOW peaks @ 381 ("only" a 4.4x increase in 6 years)
Oct, 1929. DOW crash brings market to its knees @ 199 and the official end to the bubble of the 20s.
For the next THREE years the DOW continued to decline with SIX significant rallies (I had always thought the market went straight down the whole time! Who would buy stocks after THAT crash right?) until FINALLY reaching a real bottom in July, 1932 of 41.
How much did all these rallies fake out investors? Well consider that the FIRST rally from the October crash brought the DOW back with a 50% gain all the way back to 294 by early 1930!!!! Can you believe you could have made 50% right AFTER this most famous crash? I sure didn't. Most every vigorous rally thereafter peaked only to introduce lower and lower lows. Does this all sound a lot like the NASDAQ? You bet! And if we step back and look at the market's ebb and flow with a bigger lens, perhaps, just maybe, the crash of 1987 that ushered such juicy gains in the 90s was not the true purge of excess that historians like to consider it. Perhaps, just maybe, we are yet to truly pay back even those excesses...
I would be foolish to proclaim that we have the same conditions today as we did during the Great Depression. In fact, the most confounding part of this stock market weakness is that the economy is generally in recovery phase. There is still a chance, albeit small, this economic recovery can be translated into a healthier stock market, but the market *seems* to be telling us that something foul is afoot in the near-future.
Regardless of what the future actually holds, I use this example to demonstrate that there is little new under the sun with this latest market pain. And I also use it to demonstrate why you should be circumspect jumping at the first sign of market strength once the markets become weak....in the end, fundamentals count, and, incredible as it seems, the market in general is STILL over-valued given current earnings expectations (hard to say what's in store for the stocks of small and medium sized non-tech companies though). Either the economy will have to ramp fast and hard and soon, or this Autumn will mark the climactic sell-off that I have been expecting. Again, I suspect that after that sell-off the market will begin a churn to nowhere that could last years. This does not mean there won't be rays of sunshine here and there, but it does mean that stock investing is going to offer little profit (or even fun) for most people for quite some time.
Sorry, I tried to look for the positives this year. But you can only discount the writing on the wall for so long...
Be careful out there!