本文发表在 rolia.net 枫下论坛Oct 16th 2008
History has to be rewritten after the market’s recent falls
AT THE end of 1964 the Dow Jones Industrial Average traded at 874.1. Seventeen years later, despite rapid inflation, the average had inched forward only to 875. It was the kind of grinding bear market that drove investors to despair. Near its end, Business Week famously proclaimed “The Death of Equities”.
It is beginning to look as if we are in the middle of another of those great phases, what commentators call a secular, as opposed to a cyclical, bear market. Broadly speaking, the 20th century can be divided into six phases; bear markets from 1901-21, 1929-49 and 1965-82 and bull runs from 1921-29, 1949-65 and 1982-2000.
Those unlucky enough to live through the bear markets saw their savings turn to dust. Equities were shunned in favour of alternatives such as government bonds (in the first half of the century) and property and commodities (in the inflationary second half). In the bull markets, investors made their fortunes, generally driving shares up to excessive valuations.
When the dotcom bubble burst in 2000, share valuations were at ridiculously high levels. In his book, “Irrational Exuberance”, Robert Shiller calculated the cyclically adjusted price/earnings ratio over history. This measure, which takes an average of profits over the previous ten years and adjusts for inflation, is superior to the traditional p/e ratio because profits are highly volatile. In January 2000 the cyclically adjusted p/e on the S&P 500 was 44.3; the previous peak, just before the crash of 1929, was 32.6.
That suggested markets had a long way to fall. And share prices did indeed suffer a long period of decline. In Britain, for example, the FTSE 100 index more than halved between December 1999 and March 2003. At that point, however, the effect of lower interest rates, booming corporate profits and more attractive valuations kicked in. Equities began a four-year bull run that saw the MSCI world index more than double between March 2003 and June of last year.
During that time, it would have seemed ridiculous to ask whether investors were in the middle of a long bear market. But with global equities falling by 41% this year (including the spectacular gyrations of this week), the question is now much more pertinent. The Dow was trading below 9,000 on October 15th, a level it first passed in 1997. In other words, investors who bought stocks more than a decade ago have no capital gains to show for it, only dividends (and yields have been low throughout).
Why does this matter? The existence of a bear market does not preclude the possibility of fantastic returns over shorter periods. Indeed, one striking point about the Dow’s 936-point gain on October 13th was that it climbed more in that one day than it did in the first 85 years of its existence (it was founded in 1896). Two of the very best years in American stockmarket history were 1933 and 1935, right in the middle of the Depression.
But bear markets behave rather like Lucy in the Peanuts cartoon strip. Just when Charlie Brown is persuaded to attempt to kick the football, she snatches it away. Just when investors are persuaded the bottom of a bear market has been reached, share prices slump once more. The Dow closed above 1,000 in 1972, only to fall to 616 by the end of 1974. A rally in 1975 took the average to 852, but it then gained only a net 23 points over the next six years.
Equity markets have again reached a stage where valuations look attractive in historic terms. In America, continental Europe and Britain the dividend yield is higher than short-term interest rates, a rare occurrence in the past half-century. A net 43% of fund managers interviewed by Merrill Lynch for a survey published on October 15th thought that equities were undervalued. That was the highest level in a decade.
However, those managers were not snapping up bargains. A net 49% of them had a higher-than-normal weighting in cash, a record figure. That kind of paralysis is typical of a prolonged bear market.
Even if managers feel that a complete economic catastrophe has been avoided by the bank bail-outs, they are worried about the prospects for recession, and the potential effect on company profits. (Pepsi, a core consumer-goods group, gave a disappointing outlook on October 14th.) They might be proved right in five years’ time by buying now, but they fear being proved wrong (and losing their jobs) before Christmas.
Snapping investors out of their bear-market mentality takes a lot of work. The shortest of the 20th-century phases was 17 years. With luck, time will move faster in the 21st century.更多精彩文章及讨论，请光临枫下论坛 rolia.net
History has to be rewritten after the market’s recent falls
AT THE end of 1964 the Dow Jones Industrial Average traded at 874.1. Seventeen years later, despite rapid inflation, the average had inched forward only to 875. It was the kind of grinding bear market that drove investors to despair. Near its end, Business Week famously proclaimed “The Death of Equities”.
It is beginning to look as if we are in the middle of another of those great phases, what commentators call a secular, as opposed to a cyclical, bear market. Broadly speaking, the 20th century can be divided into six phases; bear markets from 1901-21, 1929-49 and 1965-82 and bull runs from 1921-29, 1949-65 and 1982-2000.
Those unlucky enough to live through the bear markets saw their savings turn to dust. Equities were shunned in favour of alternatives such as government bonds (in the first half of the century) and property and commodities (in the inflationary second half). In the bull markets, investors made their fortunes, generally driving shares up to excessive valuations.
When the dotcom bubble burst in 2000, share valuations were at ridiculously high levels. In his book, “Irrational Exuberance”, Robert Shiller calculated the cyclically adjusted price/earnings ratio over history. This measure, which takes an average of profits over the previous ten years and adjusts for inflation, is superior to the traditional p/e ratio because profits are highly volatile. In January 2000 the cyclically adjusted p/e on the S&P 500 was 44.3; the previous peak, just before the crash of 1929, was 32.6.
That suggested markets had a long way to fall. And share prices did indeed suffer a long period of decline. In Britain, for example, the FTSE 100 index more than halved between December 1999 and March 2003. At that point, however, the effect of lower interest rates, booming corporate profits and more attractive valuations kicked in. Equities began a four-year bull run that saw the MSCI world index more than double between March 2003 and June of last year.
During that time, it would have seemed ridiculous to ask whether investors were in the middle of a long bear market. But with global equities falling by 41% this year (including the spectacular gyrations of this week), the question is now much more pertinent. The Dow was trading below 9,000 on October 15th, a level it first passed in 1997. In other words, investors who bought stocks more than a decade ago have no capital gains to show for it, only dividends (and yields have been low throughout).
Why does this matter? The existence of a bear market does not preclude the possibility of fantastic returns over shorter periods. Indeed, one striking point about the Dow’s 936-point gain on October 13th was that it climbed more in that one day than it did in the first 85 years of its existence (it was founded in 1896). Two of the very best years in American stockmarket history were 1933 and 1935, right in the middle of the Depression.
But bear markets behave rather like Lucy in the Peanuts cartoon strip. Just when Charlie Brown is persuaded to attempt to kick the football, she snatches it away. Just when investors are persuaded the bottom of a bear market has been reached, share prices slump once more. The Dow closed above 1,000 in 1972, only to fall to 616 by the end of 1974. A rally in 1975 took the average to 852, but it then gained only a net 23 points over the next six years.
Equity markets have again reached a stage where valuations look attractive in historic terms. In America, continental Europe and Britain the dividend yield is higher than short-term interest rates, a rare occurrence in the past half-century. A net 43% of fund managers interviewed by Merrill Lynch for a survey published on October 15th thought that equities were undervalued. That was the highest level in a decade.
However, those managers were not snapping up bargains. A net 49% of them had a higher-than-normal weighting in cash, a record figure. That kind of paralysis is typical of a prolonged bear market.
Even if managers feel that a complete economic catastrophe has been avoided by the bank bail-outs, they are worried about the prospects for recession, and the potential effect on company profits. (Pepsi, a core consumer-goods group, gave a disappointing outlook on October 14th.) They might be proved right in five years’ time by buying now, but they fear being proved wrong (and losing their jobs) before Christmas.
Snapping investors out of their bear-market mentality takes a lot of work. The shortest of the 20th-century phases was 17 years. With luck, time will move faster in the 21st century.更多精彩文章及讨论，请光临枫下论坛 rolia.net