The Bad News Bears: Part 1 - Investing (Canada): 05/04/1998

The markets took a short dip early last week based on rumours of an interest rate increase in the U.S. before recovering. This led to renewed speculation about a possible bear market. Although I am the eternal optimist, nevertheless, I think it is only prudent to learn from history and see what the possibilities are. "Be prepared!" as the old Boy Scout motto goes.

This week I take a look at bear markets through history. Next week a look at how to cope with a bear. Nearly all the information for this feature was found on the Internet and there is an good list of links at the end of this article. All the links will be archived in a new Net Links Library category called Bear Necessities.

The Bear Facts

Imagine, if you will, the stock market declining by two thirds - 67.7%. Fully 79% of all stocks drop. Am I talking ancient history here? 1929? It can't happen here anymore because of "safeguards" built into the system? Think again!

That market crash actually happened and it happened between February 6, 1996 and Oct. 29, 1997. It may still be declining even now as the source for this information was published in late October last year. The market was Thailand.

Other Asian economies also declined, most in the 40-50% range. The Kuala Lumpur market dropped 49.1% and fully 96.5% of stocks declined. This information comes from AERIS, an organization studying and analysing Asian markets. The table below charts the declines for the Asian markets to late October last year.

MarketHighDateLow (Oct. 28, 1997)% Change

% of Stocks That Dropped
Thailand	1415.04	2/6/96	475.16	-67.7%	79.0%
Philippines	3447.60	2/3/97	1740.18	-49.5%	81.4%
Kuala Lumpur	1271.57	2/25/97	647.32	-49.1%	96.5%
Hong Kong	16673.27	8/7/97	9059.89	-45.7%	90.5%
Singapore	2493.71	2/6/97	1479.03	-40.7%	86.6%
Jakarta	740.83	7/8/97	448.00	-39.5%	84.5%

Lest you dismiss these figures as relating to third world economies and tin pot dictatorships, please note that two of them are the powerful and highly respected Hong Kong and Singapore markets. In fact, while the Thai debacle spanned about a year and a quarter, the Hong Kong nosedive spanned only three months! In a very short space of time, great damage can be done to people's portfolios and savings.

But let's switch from the Asian markets to North America. Can it happen here? In fact, bear markets occur with fair regularity here. Depending on your source, there have been at least six or more bear markets in the last thirty years. According to Vanguard Group, the bear markets from 1965 to 1996 were as follows:

YearDuration

% Decline
1966	8 months	-22%
1968-1970	18 months	-36%
1973-1974	21 months	-48%
1980	2 months	-22%
1981-1982	13 months	-22%
1987	3 months	-34%
1990	3 months	-20%

Now the durations here are just the length of the periods of decline, not the amount of time the market took to regain lost ground. If you want scary numbers, those are the ones to look at.

In an August 1996 article in Fortune, Susan Kuhn uses a looser definition of a bear market - a 15% decline rather than 20%. She says there have been 14 such bear markets since the Fifties and the average decline was 24% over eight months with an additional thirteen months to regain lost ground. On average someone holding a portfolio intact from the start of the bear market to its eventual recovery would have had a 21 month spell of no growth whatsoever.

But that's just the average. The 1987 bear market from peak to recovery took 1 year, 11 months and 13 days. The devestating bear market of 1973-1974, however, took 7 years, 1 month and 13 days to recover lost ground. And if that isn't long enough for you, consider the great crash of 1929 and its subsequent bear market.

The Dow Jones Industrial Average hit a high of 386 in September of 1929. It dropped to a low of 40.56 in July of 1932. The previous high of September 1929 was not regained until November 1954, fully 25 years later! Now that's painful!

More recently, Japan's Nikkei index hit a high of 38,915 on December 29, 1989. It dropped to a low of 14,194 by August 1992. It is currently trading at the 16,000 level. Over eight years have gone by and the Nikkei isn't even close to recovering its former level. It could well surpass the 25 year recovery period for the 1929 crash.

How likely is a bear market today? Well, I'd say its 100% certain there will be another bear market sometime. The big question is when, how large a decline will it be, and how long will it last. And those are intangibles that are impossible to predict.

Some pundits like James Dale Davidson and Lord William Rees-Mogg (The Great Reckoning) have predicted a major depression to rival the depression of the thirties since 1990. Those who listened to them then and shunned the stock market and hoarded gold bullion are crying in their beer today. These are two very smart guys and they're either totally wrong or extremely bad timers.

Most stock watchers have come to the conclusion that market timing is next to impossible. Certainly the guru of value investing, Benjamin Graham, thought it was a mug's game.

Writing in USA Today in October last year, John Waggoner noted that since the Dow began in 1896, there have been only ten single day drops of over 7.75%. "Mercifully," he says, "market crashes are rare. Really big crashes are exceptionally rare and even less predictable."

Peter Richards, writing in Stages Magazine writes that the real problem with trying to time the market is missing out on getting back in again. Selling before a crash and buying back cheaply is a nice dream, but a practical nightmare. He notes that between 1986 and 1995, an investor who missed out on the ten best trading days would have returned an average of 10.2 percent whereas a person fully invested throughout would net a 14.8% return. If the in and out investor missed the best 40 trading days, his return falls to a paltry 2.5%. Yikes!

And yet, there are great concerns expressed by today's markets. They're over-valued say many. Susan Kuhn notes that in 1982 the stocks in the Standard & Poor's 500 sold at an average of 7.3 times earnings. At the time of her article (two years ago) the average P/E was 18.6. "If stocks got that cheap again (1982 P/E)," she wrote, "the Dow would fall 61%."

Given this great concern, and given the folly of market timing, what can an investor do to avoid being devestated by a major bear market? Particularly one that takes years to recover? We'll explore that question next week!

Links of Interest

1929 Crash
Chart of 1929 stock market crash from Lowrisk.com (more on them next week).

1998 Bear Market?
Charts show what an equivalent to 1987 drop would do to today's market - from Lowrisk.com

Disclaimer: As with all my columns here, I should re-iterate a precaution. I am not a professional financial advisor. I am a financial journalist and editorialist. The views in these columns are my personal opinions.

American Readers: Looking for a broker who can sell you Canadian stocks? One of my brokers is licensed to sell securities to Americans in 26 states. She works for Canaccord Capital which is an excellent company with a superb research department. They are particularly knowledgeable on resource issues. Send me a note if you want to get in touch with her.

I'll be adding a new Library category called Bear Necessities later this week where all this week's and next week's links will be archived.

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