New Stock Market Alert!

Back in December 2002, we went through a terrible bear market. Well, at least for that time period it was a terrible bear market.  Compared to today, it was a walk in the park.  I remember thinking about everything I knew about stock markets and coming to the conclusion that there had to be more to the story.  I began doing a great deal of research on the history of stock markets.  I have always believed that history can tell us a lot about today. 

Yes, the times have changed.  However, investing is driven by human emotions and people react in the same exact way every time. This is why there is so much relevance to the famous Mark Twain quote, “History doesn’t repeat, it rhymes.”   There is always a thread of similarity between time periods.

I remember coming across a book called Stock Cycles by Martin Alexander.  I started reading his book and came across his main thesis for the book that forever changed the way I looked at investing and the stock market.

Here is the chart that drives his thesis:

This was an eye opener.  It shows that the market is a series of really good periods or bull markets followed by a series of bad periods or bear markets.  During these long-term periods, you encounter a series of alternating good (bull) periods and bad (bear) periods.  The type of period that you are in should be your main concern.  If you are in a long-term bear market, investors stand to lose a lot of money or make no money at all during that time period.

This chart shows that we were in a long-term bear market between 1966 and 1982.  That was a horrible period for investors.  Then there was the great long-term bull market of 1982 to 2000.  Did we start a long-term bear market in 2000?  Well, everything fits and would suggest that we actually did.

The last 7 long-term bear markets lasted an average of 13 years.  That could mean we have 4 more years left in this current bear market.  However, this crisis we are facing today is more like the 1929 to 1949 long-term bear market which lasted 20 years.  Do you really think that what we are facing is going to be average?  Beyond the Great Depression this is the most serious situation that this country has faced.  Further, what we are facing with regard to the national debt is unprecedented.

Is there any good news in this chart?  Yes, there is some good news.  Long-term bear markets don’t just go down the entire time.  There are short-term bull markets that occur during these long-term bear markets.  Although I still think that we will go back to the March lows as a minimum, following that could be a period longer than just a few months where the market could actually turn into a short-term bull market.  

If this is confusing, let me give you a visual that puts this into perspective. 

1966 to 1982 was a long-term bear market where the Dow Jones Industrial average was at 991 in 1966 and finished at 784 in 1982.  However, during that 16 year time period where the Dow Jones did so bad, there were two times where investors made lots of money. 

Time period 1 – 1970 to 1973 – The Dow Jones went up 49%.

Time period 2 – 1974 to 1978 – The Dow Jones went up 61%.

Following what might be one more strong decline, we might be looking at a great time to actually be in stocks for a long time period.  Thus far the 2000 long-term bear market looks like this:

2000 to 2002 The Dow Jones Lost -37%

2002 to 2007 The Dow Jones Gained +93%

2007 to March 2009 The Dow Jones Lost -52%

2000 to March 2009 The Dow Jones has lost -42%

The key is taking advantage of the good periods and playing it safe during the bad ones.  I realize it’s easier said than done.  However, the key is to figure out a strategy to at least try versus staying fully invested in stocks during the entire time period.   

Tags: bear market, Bob Brooks, Bull markets, crisis, Deceptive Money, Dow Jones Industrial Average, Great Depression, Martin Alexander, Prudent Money, short-term bull market, Stock Cycles, stock markets