Nothing Strange About the 2008 Market! November 14, 2008

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Sy Harding

There have been a lot of comments in the media and among investors all year about how strange the stock market has been acting this year.

I don’t agree. Except for the wild day-to-day volatility (after the SEC allowed the abolishment of the up-tick rule on short-selling last year) the market has been acting quite normally.

It handled the turmoil created by the collapse of the housing bubble and the onslaught of the sub-prime mortgage mess last year quite well, reaching a new bull market high in October of last year.

Always looking ahead six to nine months, it then topped out normally in anticipation that those problems would finally have the overall economy slowing this year. As recently as the end of August, the S&P 500 was down only 18.1% from its peak of last October. That was normal, since in August Wall Street, the financial media, and even the Federal Reserve, were still assuring consumers and investors that, although the economy was slowing, it would not slow all the way into recession.

Then came recognition that we were headed into a recession. Having to factor that scenario into stock prices, the S&P 500 lost another 9% in September.

As the economic outlook then worsened further, the expectation becoming that the recession will be one of the more serious versions, perhaps as severe as that of 1973-74, the market lost another 17% in October. And the first half of November has not been any better, the S&P 500 declining another 11% in the first two weeks of this month.

I suspect not too many investors realize they have now experienced one of the worst bear markets of the last 70 years, already as bad as any the last generation suffered through.

At the close on November 12, the S&P 500 was down 46% from its peak of last October. In the bear market of 1973-74 the S&P 500 declined ‘only’ 45.1%.

You have to go back to the bear market of 1937-38, 70 years ago, to find a more severe bear market. (The S&P lost 49.1% of its value in that 1937-38 bear). Yes, the current bear market has already been the worst in 70 years, moving the dreaded bear market of 1973-74 back to second place over that period.

So is it possible the stock market has already factored in a recession like that of 1973-74? If so, can it soon look out six to nine months, and anticipate improving economic conditions? Was the October low the low from which smart money buys in anticipation of that?

Speaking of smart money, Warren Buffett’s article in the New York Times a month or so ago, saying it’s time to buy again, has been pretty much forgotten with the market’s further decline.

But here’s another interesting comparison to the market bottom in 1974. In my current book, Beat the Market the Easy Way, I wrote of how Buffett had pulled off one of the most exquisite market-timing moves of all time.

Buffett was not well known in the 1960s when he was running a very successful private investment firm, similar to the hedge funds of today. But after making huge gains in the mid-sixties bull market, he surprised everyone. He cashed out entirely in early 1969 and completely turned his back on the stock market. He liquidated his investment partnership and dispersed the assets back to his investors, telling them they would be better off in government bonds for the next several years.

Then five years later, in 1974, after the severe 1973-74 bear market, in a famous interview in Forbe’s magazine, he said, “This is the time to start investing again.” And he did, using Berkshire Hathaway, which he had taken control of and was running while on hiatus from the stock market, as the holding company for his new investing venture. And the rest is history.

And after another 46% bear market, Buffett is once again saying it’s time to buy? So far he has been early, and has paper losses on his latest known purchases, Goldman Sachs, and General Electric. But he apparently thinks a 46% bear market is sufficient to factor in the possibility of a recession as severe as that of 1973-74.

Food for thought anyway.

Sy Harding publishes the financial website http://www.streetsmartreport.com/ and a free daily Internet blog at http://www.syhardingblog.com/. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!