We’re in the first serious bear market in 30 years
On March 15, 1999, while the stock markets were still continuing their wild upward climb, I submitted an article to The Union which the newspaper declined to publish. In view of what has happened over the past four years, now might be a good time to read the gist of that article. Here it is:
In 48 years as a stockbroker, I’ve lived through the good times – and the bad ones. One thing I know for sure: stocks do not go up in a straight line, and they don’t go down in a straight line. Every bull market has periodic 10- to 20-percent declines before continuing its upward progression. And every bear market has periodic 10- to 20-percent recoveries before continuing its downward trend. And I’m convinced that we’re now headed for a down market.
First, let’s look at the forces which I believe might continue pushing the market up for a while:
1. A healthy economy.
2. Low inflation.
3. Corporate pension plans putting money into securities.
4. Maturing “baby boomers” looking toward their financial futures.
5. A feeling of euphoria among investors.
6. The tremendous number of new brokers telling people to buy.
Now let’s list the forces which I believe could cause a serious drop in the market:
1. A feeling of euphoria among investors, whose overly optimistic view of the market has historically preceded a serious drop.
2. A present price-earnings ratio of 37 to 1, compared with 7 to 1, which is where it was at the start of the current rise.
3. More than 5 million on-line traders, many of whom have had little previous investment experience, who can panic as easily as they can be bullish.
4. The tremendous number of new brokers who have never witnessed anything but good times.
5. A recent interview with Alan Greenspan, in which he said all of his investments are in government securities.
6. The recently published “The Crisis of Global Capitalism” by George Soros, a multi-billionaire who made it by speculating in international securities.
7. An article starting on Page 34 in Time magazine discussing “what has become a plague of economic panics,” stating “. . .the tiniest perturbation could send the whole economy tumbling, and there are perturbations all over the place.”
The article then revealed how close we were to a global financial melt-down last December – and the general public never knew it.
I can never make promises or guarantees about the future of any financial instrument. But I do wish that article had run, as it might have saved a lot of your readers some serious headaches. I’m now making another educated guess that the downward trend that’s happened over the past three years will continue for some time. In other words, I believe that we’re in the first serious bear market we’ve known in 30 years.
As indicators, I cite the following:
1. Despite the serious decline over the past three years, stock averages are still an outrageous multiple of almost 35 times earnings.
2. Despite the Federal Reserve Board’s drastic series of interest cuts over the past three years, bond prices have dropped, whereas historically they have risen in such periods.
3. No one still knows how much fiscal chicanery has been practiced by some large corporations and their overseeing accounting firms, nor do we know what financial fallouts will occur as disclosures continue to be made to the public.
4. Temporary recoveries such as we’ve seen over the past few months are common during falling markets, and often become pitfalls.
5. Economic indicators are still strongly negative.
6. Almost no present-day investors or brokers have lived through a genuine bear market, and so are unprepared for the ultimate panic that often occurs during the final days of such markets.
Otto Haueisen lives in Nevada City.
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