|Tuesday March 24, 2009|
The Great Bull Market
Wall of worry
Throughout history bull markets have been born out of pain and adversity and truly climb a wall of worry until they're on a firm footing. At the end of WWII, soldiers returned from the battlefields of Europe and Asia. They married and started families and then bought millions of new homes, TV sets and automobiles. This set the stage for the recovery of an economy that had suffered through the Great Depression and another world war. The newfound prosperity persevered through the 40s, 50s and 60s and eventually the economy became so hot that inflation got completely out of control in part because of immense spending on the Vietnam War. Rampant inflation became the order of the day during the 1970s when many saw the value of their homes grow by more than their annual salary.
But this newfound prosperity was not enjoyed by the stock market because inflation is one of its mortal enemies. The stock market suffered through a long two-year bear market in 1973-1974 that saw the Dow Jones Industrial Average slump to 777, coming within 50 points of its old 1961 high. Very high levels of inflation continued throughout the1970s until the Federal Reserve aggressively increased interest rates to beat it into submission. The move succeeded in bringing inflation to its knees but unfortunately the economy was a victim also. A debt crisis ensued and millions of unemployed baby boomers were the collateral damage.
It took until 1982 before a new economic recovery was born. Slowly investors who had previously sworn off stocks forever returned to the stock market and by mid-1982 the longest running bull market in history was born. By August 12th 1983 the Dow had climbed to over 1200 and was on its way to an ultimate high that was almost 11,000 points from where it had started. In 1984 Real Economic growth was an amazing 7.4%.
An investment scenario never to be repeated
From 1982 until 2000 the stock market went through a combination of investment scenarios in an unrelenting upward journey that is unlikely to ever be repeated, certainly in our lifetime.
As interest rates fell, investors continued to refinance and re-mortgage at lower and lower rates. Instead of saving or lowering their debt, they increased debt by buying larger homes, extra vehicles, vacation properties and by throwing money at the stock market with no concern as long as the bull was alive. In the mid 1990s two elements of the greatest investment bubble in history were falling into place as investors discovered internet stocks and Wall Street convinced them that valuations of companies like Amazon.com, Nortel Networks, and Lucent, no longer mattered in the new economy.
In 1998 two of the final investment gifts were handed to Americans when the Asian economies collapsed. This led to a massive flight-to-quality flow of foreign funds into our already overvalued equity markets and allowed us to keep spending our new found wealth on cheaper foreign imported products and even more stocks.
A new bear arrives
However, the beginning of the new millennium brought an end to the longest running bull market in modern history. A new bear market arrived and the economy went into recession. Now the world edges closer to a deflationary economic spiral. Illiquid companies are collapsing, forcing workers into unemployment lines with little hope of finding new jobs. Those without savings will be forced to sell assets into falling markets that will further depress prices, and so the spiral will continue. They'll sell stocks, vacation property, and extra vehicles and eventually start visiting neighborhood pawnshops as they struggle to make minimum payments on credit cards.
This new bear market will play itself out at some time in the future and in the process investors may again swear off stocks forever. But like all other bear markets it will eventually yield to renewed economic activity and confidence will return to owning stocks again and another bull market will be born.
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