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Shadow of '70s Bear Looms, but Was It Really as Bad as We Think?

November 03, 1996

Probably the best indication that the 1990s stock bull market isn't over is that Wall Street professionals spend so much of their time talking about its demise: how it might end, how much the market could fall, how long the decline could last.

It's a logical exercise, one supposes, given that stocks have been moving mostly up for six years now. This won't go on forever, and everybody knows it--or should.

But discourses about what might trigger a severe bear market, and what that bear cycle might look like, inevitably rely on history for points of reference.

And what we know of history is that it doesn't repeat itself--not exactly, anyway.

If you somehow could know that the U.S. market was headed for a 1930s-style collapse--which saw the Dow Jones industrial average peak at 381.17 in 1929, lose 89% of its value in three years, then remain below the 1929 peak until 1954--you might well decide it was time to sell some or all of your U.S. stocks.

But barring a disaster of that magnitude, many investors believe they have no compelling reason to sell now. The average bear market since 1950 has lasted eight months and slashed 28% off the typical blue-chip stock. A lot of people believe they could ride out such a decline, at least if we trust the many surveys on the subject.

Averages, however, are what you get when you mix in a lot of numbers, big and small. And just as this bull market's numbers are big in historical terms, many veteran investors fear that the next bear market will also be about big numbers--as in very big losses, stretched over a long period.

The point of reference for many of the truly worried is the bear market of 1973-74. The Arab oil embargo of October 1973--and the subsequent surge in world oil prices--took what had been a typical market decline and turned it into the worst stock collapse since the 1930s.

From its peak of 1,051.70 on Jan. 11, 1973, the Dow plunged to 577.60 by Dec. 6, 1974, a stunning loss of 45% that ruined countless fortunes, not to mention countless Wall Street careers.

For the minority of investors who were bearish even before the oil embargo set off the vicious global inflation cycle of the mid- to late 1970s, stocks' dramatic slide in 1973 and 1974 was the logical conclusion to what they viewed as a period of absurd overvaluation in the market, particularly for the era's blue-chip companies.


Today's bears, of course, also point to overvaluation among blue-chip stocks, and see a similar comeuppance on the way. And the one bit of historical data they love to throw in the face of impressionable investors is this one: From the Dow's 1973 peak of 1,051.70, it took nearly 10 years for the index just to get back to that level.

The implication is that many stock investors didn't make a dime from 1973 until 1982, when a new bull market finally was born.

On the surface, it would seem quite plausible that stocks were dead money for 10 years. The continuing oil crisis caused inflation to soar into the double-digit range in the late 1970s, and high inflation always ravages financial assets. Inflation was only corralled after the Federal Reserve Board jacked up interest rates to the 20%-plus range in 1979 and 1980, triggering two recessions in a 24-month period.

Looking back, you wouldn't think most investors would have wanted to mess with stocks then. And people who were active in that period will probably remember that the hot investments were things like money market mutual funds (which at their peaks paid short-term yields of about 20%), oil and gas limited partnerships and, naturally, commercial and residential real estate.

For investors today, many of whom are planning to retire within five to 10 years on their spectacular stock market gains of the 1980s and '90s, it's a chilling thought to imagine their portfolios falling 45% over the next two years, then taking another eight years just to get back to even.

But here's the problem with the bears' romantic notion about the post-1974 stock market being a basket case for a decade: It just isn't true.

In fact, many investors made very good money in stocks from 1975 through 1982, even though the Dow index's performance in that period doesn't reflect it.


First of all, consider what happened after the carnage of 1973-74: Even though oil prices stayed up, as did inflation and long-term bond yields, stocks simply got way too cheap in 1974 as panic selling set in. The result was a furious Wall Street rally in 1975 that carried into 1976, with the Dow up a total of 63% from Dec. 31, 1974, to the end of 1976.

After that, however, blue-chip shares struggled as many U.S. multinational companies' fading competitiveness with the rest of the world was worsened by the oil shock. Charles Allmon, a Maryland money manager, used to rail against blue chips of the day, saying they had turned into "blue gyps" with their lousy profits and poor stock-price performance.

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