In Bear Country, Look Out and Be Logical

The bad news--although no surprise considering that stock prices have been falling for weeks--is that we’re in a bear market.

But the good news is that stocks have been falling a lot longer than that. The bear market isn’t new, as many reports are saying. The Dow Jones industrial average or the Wilshire index of 5,000 stocks may have declined 20% since July, but other indexes have slid longer and further. The Value Line index of 1,700 large and mid-sized companies is down almost 30% in the last year; the Russell index of 2,000 small companies is down more than 22%.

The year’s duration is significant because it means that the bear market’s end could be in sight, experts say. “The average bear market lasts about 15 months,” says Kenneth Fisher, head of Fisher Investments, of Woodside, Calif. “An upturn could come after the first of the year.”

Of course, that average covers a great range--from the three-year bear market that followed the 1929 crash to a six-month bear market in 1961. The bear market after the 1973-74 oil price rise--an obvious comparison for the present--lasted 23 months.

By definition, a bear market culminates in a collapse of confidence, when nobody can see a reason for holding stocks. That point, when all hope is gone, is when the bear market ends. Good economic news isn’t necessary to reinvigorate the market. In August, 1982, for instance, stock prices began to move up while the U.S. economy was still in recession--and they continued moving up, many trebling in value, until the Crash of October, 1987.

For you as an investor, a bear market is not a time to sell and may even present buying opportunities. That’s because the duration of the market’s decline--15 months, two years or whatever--is shorter than the three- to five-year time horizon that an individual should have when investing his or her money. Having a time horizon doesn’t mean that a stock or mutual fund must be held for five years. One can sell at any time, obviously--preferably when prices are high. But attempting to look out several years lends perspective and puts investment thinking beyond the daily headlines and the evening news.

Take the present. Predictions for the U.S. economy are almost unrelievedly gloomy. Many economists say recession is here; one who doesn’t, Edward Hyman of the C. J. Lawrence Morgan Grenfell investment firm, nonetheless foresees no economic growth for all of next year. Negotiations over the budget deficit in Washington reflect only futility in government.

Globally, the atmosphere is no better. At this weekend’s meeting of the International Monetary Fund and the World Bank, the problems of Eastern Europe and the Soviet Union are being stressed. Last fall, you’ll recall, all was promise in the opening of the East.

In Japan, the stock market’s fall is now extreme--prices down 45% this year so far--as inflation unwinds in stocks and Tokyo real estate. Predictions are that Japanese capital will be scarce in world markets and absent from sales of U.S. Treasury bonds.

Finally, of course, there is the Iraq crisis, the rising price of oil and the possibility of war.

Faced with all that, an investor should look ahead and think logically. The U.S. economy won’t be in recession three years from now, a year after the next Presidential election. America’s own savings will fund the budget deficit, as they have begun to do now, and the trade deficit could vanish thanks to business with Eastern Europe and the Soviet Union as well as Mexico and Latin America.

Japan will still possess industrial prowess in a rapidly developing Asian market.

The Iraq problem will have been dealt with, and new efforts will be under way to spread economic development in the Middle East. The price of oil three years from now will be $20 to $30 a barrel, meaning that gasoline prices will be just about where they are now.

If you’re thinking investments, you could start by taking hints from last week. MCA stock shot up 70% on a takeover report and thereby called attention to the value of entertainment companies, notably such companies as Paramount Communications and CBS. Many analysts note that Paramount, one of the last independent movie studios, and CBS, the TV network, have more than $1 billion in cash--an important consideration for the present.

Think expanding overseas markets. Dresser Industries, a Dallas-based oil field equipment firm, has courted business in the Soviet Union for years. Its courtship may pay off in the next few years. Similarly, Deere & Co., the world’s leading manufacturer of farm equipment, should benefit from attempts to modernize agriculture in Poland and the Soviet Union.

More than big companies will gain world markets in the global ‘90s. Money magazine, in its latest issue, cites smallish, $148-million revenues St. Jude Medical--a producer of heart valves--for expanding overseas sales along with such giants as McDonald’s, Pepsico and ConAgra that are growing internationally.

Be a contrarian. David Dreman, author of “New Contrarian Investment Strategy” and head of Dreman Value Management, an investment counseling firm, is buying selected bank stocks just when others are selling the banks. “Companies like First Fidelity Bancorp, PNC Financial, Fleet/Norstar, BankAmerica, First Chicago are cheap these days,” Dreman says.

And Dreman also likes Ford Motor Co. because he can buy it for about $30 a share and collect a $3 dividend--a 10% yield.

Clearly there are no unvarying rules to investing.

As the late T. Rowe Price, founder of the mutual fund company that bears his name, used to say, “buy value and grow with it.” Enough said.