In The Midst Of A 17-Year Bear?

Are We In The Midst Of A 17-Year Bear Market?

By Gary Alexander | 24 July 2009

The war on stocks continues. [Several] weeks ago, I wrote about the claims of financial analyst Robert Arnott, who critiqued Professor Jeremy Siegel for the performance of stocks vs. bonds in the long run. Now, the stock-bashers are piling on Professor Siegel once again. In [a more recent] Wall Street Journal, "Intelligent Investor" column, Jason Zweig opened with the same triumphant trump card: "As of June 30, U.S. stocks have under-performed long-term Treasury bonds for the past five, 10, 15, 20 and 25 years."

In the core of his article, Zweig critiqued Siegel’s earliest data, from 1802 to 1870, as being spotty and inaccurate, and he’s right. But stock market performance in the early 1800s is fairly irrelevant today. The stock market was primitive. There were some days in which fewer than 100 shares traded on Wall Street.

Casting aside ancient history, using only the more reliable data from the last 125 years, Siegel’s case is still solid: Wise investing in selected stocks is still the primary road to wealth for the average investor. The problem is that bad times can go on for a very long time— namely, about 15 to 20 years at a time.

The Five (And A Half) 17-Year Bull And Bear Markets Since The Birth Of The Fed

Market cycles are not locked in stone for any demographic or mystical reason, but in the 95 years since the birth of the Federal Reserve, the stock market has swung in very lengthy bull and bear market trends sometimes referred to as 'secular'. In shorthand terms, [the author believes that] the government has played a major hand in each of these wide market swings:

[ Normxxx Here:  Major, perhaps; decisive, no. Five (and a half) times in less than 100 years (for a cycle lasting 17 years) is a lot to ask of coincidence or repeated error on the part of the Fed. Besides, such cycles are scarcely new, but can be noted in the historical record well before the Fed ever existed. We eliminated two Fed forebearers: the First and Second Bank of the U.S. during similar long bear markets— to no avail. Indeed, it was the panic of 1907 and memories of the "long depressions" of the 19th century that set the wheels into motion that led to the creation of the Fed in 1913. In that earlier era, recession/depression alternating with good times was a periodic phenomena based on the same boom/bust cycle evident today, but more rigidly enforced then (and rather more painful) by the periodic need for money (ie, the quantity and value of gold in circulation) to reestablish a sutable equilibrium with the value of goods— forcing excessive inflation to flip to deflation as credit collapsed.  ]

(1) The 1920s bull market (over 500%) was fueled mostly by tax cuts and credit expansion
(2) The 1929-42 bear market (-75%) was exacerbated by high tariffs and credit contraction
(3) The 1949-66 bull market (over 500%) was created by free trade policies under GATT
(4) The 1966-82 bear market (-22%) was deepened by profligate fiscal and monetary policy
(5) The 1982-99 bull market (over 1400%) was inspired by tax cuts and a war on inflation.
(6) The current bear market (-30% so far) is due to [excessive?] deregulation, plus a revival of Guns & Butter


Click Here, or on the image, to see a larger, undistorted image.

The Market’s Wide 17-Year Swings Since The Birth Of The Federal Reserve

1914 to 1929 Bull market +617%
1929 to 1947 Bear market -57%
1949 to 1966 Bull market +516%
1966 to 1982 Bear market -22%
1982 to 1999 Bull market +1409%
Since 1999 (Bear market) -30% <sup>*

*</sup> All figures based on the Dow Jones Industrial Average, which does not account for dividends or inflation. The declines in 1966-82 (and since 1999) would be much worse after inflation, which rose faster than dividend yields.

How Government Policies Caused[!?!] The Major Bull And Bear Market Inflection Points

1930: Smoot-Hawley tariffs and the Fed’s deflationary policies killed the market recovery. Six months after the 1929 crash, in April, 1930, the Dow had climbed all the way back to 294, about 50% above its mid-November 1929 panic low. But then the Smoot-Hawley trade bill was signed into law on June 17. That day, the Dow Jones index fell by a massive 19.64 points (-8%), from nearly 250 to 230. The world retaliated against Smoot-Hawley by passing their own tariffs, leading to isolationism and World War II.

1947: GATT and the Marshall Plan rescued global economies and our stock market. In a mirror image of the protectionist Smoot-Hawley trade bill of 1930, the birth of the General Agreement on Tariffs and Trade (GATT) in 1947 created postwar prosperity. Politically, in a mirror image of the punitive Treaty of Versailles, the world helped rebuild Germany and Japan with the Marshall Plan and other temporary relief measures. The Dow rose six-fold from 163 in mid-1947 (and 161 in mid-1949) to nearly 1,000 in 1966.

1966: Fiscal (Guns & Butter) policies and profligate monetary policies doomed the stock market. LBJ escalated the war in Vietnam while launching multiple new domestic programs. He also took silver out of U.S. coins and enlisted the Federal Reserve to inflate money to fuel a phony prosperity. Nixon followed suit, closing the gold window and instituting wage and price controls, while fighting wars and launching new welfare programs. The result was a decade of "stagflation" (inflation and no growth) in the 1970s.

1982: The worst postwar recession (until then) included unemployment, interest rates and inflation in double-digits. The economy had declined in eight of the previous 12 quarters, since Fed Chairman Paul Volcker had spent three years choking off the money supply to kill the inflationary beast. But that medicine worked. In August 1982, he stopped the punishment and began easing the Discount Rate dramatically, while the President and Congress were cutting taxes to fuel a strong economic recovery and stock bull market.

1999: Fears of Y2K caused the Fed to expand liquidity way too fast in late 1999 (and then they raked in that money too rapidly in early 2000), adding to the tech bubble and making its "pop" bigger. In addition, the Gramm-Leach-Bliley Financial Services Modernization Act (passed overwhelmingly by Congress) was signed by President Clinton on November 12, 1999, right before the stock market’s peak. It allowed the creation of mortgage-backed securities, collateralized debt obligations (CDOs) and Structured Investment Vehicles (SIVs)— all those names which have become infamous by now— but there is more:

2007: The market decline of 2007-09 was also caused by massive government spending (Guns and Butter II) under President George W. Bush and a Republican Congress. Trying to fight 2½ wars while also trying to solve a variety of social ills— and never vetoing a bill— Bush’s administration was a reflection of the same kind of hubris which destroyed Johnson’s first Guns and Butter efforts back in the late 1960s.

What’s Next? The bottom line of this brief history lesson is that specific financial blunders in 1930, 1965 and 1999 led to deep and long market declines, while enlightened policies in 1948 and 1982 led to long, powerful market surges. What will be the government’s next big mistake— or enlightened breakthrough?

The future is not locked in stone. The decisions that President Obama, Congress and the Fed make in the next year will determine if we have 7 to 10 more bad years or maybe only one more flat year before the next bull market. Voters also have a say: The mid-term elections of 2010 may help rescue our portfolios.