Bears Trip Again--This Time Over Coup
To the stock market’s Super Bears, the fall of Soviet President Mikhail S. Gorbachev looked like “the big one”--the event that would finally spark the horrendous collapse in stock prices that has for so long eluded the doomsayers.
Unfortunately for the Super Bears, Gorby is back, and U.S. stocks have already made up what they lost in their brief selloff Monday. The Dow Jones industrials closed at 3,007.38 Thursday, up 5.59 points for the day after soaring 88.10 points Wednesday.
The New York Stock Exchange composite index, meanwhile, rose 0.45 points to an all-time high of 214.34.
That’s the way it’s been for the Super Bears since the stock market crash of October, 1987. Whenever disaster has struck, the Super Bears have been there to say, “You ain’t seen nothing yet!” However low stock prices have fallen, the S.B. crowd (an amorphous group of investors, analysts and newsletter writers) has consistently predicted that the market would go much, much lower--and stay there for perhaps years.
Each time, they’ve been wrong. The average stock keeps bouncing back, and quickly. And that is forcing many investors to rethink the idea that the market as a whole must go through some kind of extended purge in the ‘90s to atone for the wild debt-and-excess party of the ‘80s.
Look at the record: After the ’87 crash, the Dow index rose 12% in 1988. In 1989, despite a one-day October mini-crash of 190 points, the Dow rebounded to close the year with a 27% gain.
Last year, the S.B. crowd did get their bear market, thanks to Saddam Hussein and the first recession since 1982. But when the Dow fell from 2,999 in July to 2,365 in October, the Super Bears insisted that the decline was just beginning. They saw 1,500 or even 1,000 as the ultimate low.
But 2,365 was the worst the Dow would do. Not even a year later, we’re back at 3,000.
Peter Eliades is one S.B. who recently admitted to his subscribers that a little bit of “paranoia” is setting in. Eliades, who writes the Stockmarket Cycles newsletter from Santa Rosa, Calif., is a respected chartist--an analyst who attempts to forecast market moves by studying historical price patterns.
In his latest newsletter, he wrote what he imagined some subscribers must be thinking:
“Come on, Eliades! You told us in October, 1989, we were at a major top. Then you felt that January, 1990, would be the final high. Then in July, 1990, and November, 1990, you repeated the story. Next you touted May, 1991, as the possible final high. . . . How many more final tops can there be?”
Eliades has for years predicted a devastating bear market that would take the Dow to between 1,000 and 1,300. He bases his forecast in part on the natural cycle of the market: There are long periods during which people want stocks, and long periods when they don’t. This is the end of the bull market that began in 1982, he argues.
So why do stocks keep rebounding, instead of following the extended bear cycle he projects? Eliades admits that he can’t explain it completely. The best answer, he says, is that “the market likes to catch every last person, and every last penny in their pockets, before it really goes down.”
With every rebound in recent years, more investors have decided that nothing truly awful can happen to stocks for very long, he says. So people keep piling in. But at some point, he says, “the market will catch that last guy,” and the collapse will begin.
Other Super Bears base their pessimism purely on the fundamentals. Michael Murphy, who writes the Overpriced Stock Service newsletter from San Francisco, notes that stocks are near historical highs in terms of price-to-earnings-per-share ratios (the S&P; 500 stock index P-E is about 18), and near historical lows in terms of dividend yields (3.2% on the S&P; 500). Whenever stocks have gotten to those valuations in the past, disaster has loomed, Murphy says.
But does this time have to be like all the others? The cardinal sin on Wall Street has usually been to argue that things are “different.” It becomes an easy way to talk yourself into paying too much for a stock. Yet the difficulty for many investors today is that, although they understand that stocks aren’t cheap historically, they know that some things are different, says Charles Brandes, a San Diego-based money manager.
For one thing, he notes, “the world political situation is so much improved” over any other decade in this century. What kind of premium does the global spread of free markets add to the price of the average American stock? Maybe more than we know.
What’s more, the Super Bears who see a sustained bear market may be losing sight of the speed with which the market moves today to separate good stocks from bad. Indeed, for many stocks, a bear market has been reality since 1987, as the accompanying chart shows. Yet enough other stocks have fared well enough to keep the broad market moving ever higher.
With falling interest rates, an aging (and thus investment-oriented) population and a world of free markets blossoming, to believe that the stock market overall is going down for a long, long time seems an odder idea now than in 1988, 1989 or 1990. The Super Bears will certainly have their way with stocks of individual companies that stumble, but a year from now, chances are that their argument about a Dow of 1,000 will no longer even merit discussion.
A Long Bear Market? Sure--For Some Stocks
Wall Street’s “Super Bears” argue that the market will soon go down and stay down for years. But what seems more probable is the same “rolling” bear market we’ve had since 1987--some stocks get trashed while others soar, and the overall market rises. How some well-known stocks have fared since 1987:
1987 Current Stock peak price Change Philip Morris 31 1/8 73 1/4 +135% Quanex Corp. 9 17 1/2 +94% Conrail 40 7/8 70 1/4 +72% Intl. Dairy Queen 11 7/8 19 3/4 +66% Monsanto 50 1/8 75 1/2 +51% Dow indus. avg. 2,722.42 3,007.38 +10% Weyerhaeuser 40 27 5/8 -31% Federal Express 75 1/2 39 1/4 -48% Outboard Marine 38 17 3/4 -53% Maytag 32 3/8 15 -54% Texas Instruments 80 3/8 31 1/4 -61%
Stock prices adjusted for splits where applicable.
