Comparing Two Bear Markets - Then And Now

[anonguest]

A seemingly frequent mention in stockmarket 'history' articles discussing past bull and bear markets is the constant comparison of the 1966-1982 DOW bear vs the post 2000 market to date - the general insinuation being that the post 2000 market is roughly speaking carving out a similar long drawn out period of no overall capital gain, etc.

I took another close look of both the DOW and the S&P500 as opposed to just the DOW as such articles always seem to do - and made an interesting observation. Although I concede it could be nothing more than looking at a chart and seeing what you want to see, akin to seeing pictures in clouds...

Basically, if one looks, the DOW famously 'went nowhere' by 1982 - and was still sub-1000. The 1000 level famously seemingly behaved as a ceiling that it kept failing to punch through (albeit very briefly in the early 70's where it went through for a few days). That index stayed stuck in a wide 25%-ish range, with a few relatively short lived panic V-shaped spikes down well below that level.

Interestingly, if you have a look at a long term multi year chart, during this same period the S&P500 actually managed to painstakingly claw its way to three progressively and modestly marginally higher highs at around each time the DOW was reurning back up to the 1000 level.

Of course the increasingly rampant inflation of that era meant that investors in both of those markets would have lost out big time in real terms - but investors in the broader S&P500 would have seen the smaller losses.

Now fast forward to today and the post-2000 market track record.....

I note that there appears to be a reversal of fortunes at work. It appears as if the S&P500 is emulating the DOW chart of the 1966-1982 era. There have been two major tops so far, with the second only just briefly surpassing the first - and is now well below the peak levels.

The DOW on the other hand 'appears' to be on a very modestly upward trajectory via, thus far, two successively higher tops (11,700 in year 2000 and 14200 in 2007) - and now appears to still be recovering from the most recent and deepest plunge. It is sobering, despite all that is going on the world and the US, that this index is still appearing so resilient - and once again so close to its all time highs.

Again, as then and despite all the talk of deflation today, CPI is constantly positive and so, since 2000, both indexes will have struggled to return real capital gains - but it is clear that thus far it is the DOW that is the 'winner' in this respect. Adjusted for CPI the S&P500 will have performed abysmally since 2000.

This led me to wonder as to what might be the broad and general 'driving force' to result in this noticeable difference between these two major indexes - and the seeming reversal of behaviour between now and then.....

My simplistic thesis and explanation?

Back in the 60's and 70's the stocks that made up the S&P500 would have been regarded as the 'growth' stocks of their day? (if not still!) - and so have greater promise of capital growth, etc. Whereas the DOW stocks were (still are?) the stodgy non-growth blue chips paying steady dividends, etc. Thus to combat the inflation of the era more faith would have been placed in the mid-cap stocks to help deliver sufficient returns to help better keep ones head above water so to speak? To a modest extent this was borne out by the flow of money into the S&P500, resulting in those progressively higher highs duing those 16 years.

And today?

Perhaps the mechanism and mindset at work that is driving these indexes differently is that 'today' (i.e post-2000 and certainly incresingly of late) is;

1) that the inherent higher 'risk' associated with the various businesses making up the S&P500 offers lower chance of growth (indeed many of these now more mature companies could reasonably be considered to not be the growth stocks they once were?), and

2) the broader economic concerns (deflation, euro collapse, war, etc) of today are leading investors to seek more 'guaranteed' returns and indeed businesses in which return of money is more assured. The modestly higher dividends of the DOW, when compared with the ultra low interest rate environment, also add to appeal given that CPI is historically low (yeah yeah I know it aint really, but investors still 'measure' things and base decisions on official data)

Despite the turbulence of recent weeks and months could we really see the DOW continue to defy 'common sense' and continue to painstakingly claw higher such that, before we know it, we will see it make a new and third all time high (albeit in nominal terms and not necessarily in real terms)?????

Other peoples thoughts?

Edited June 17, 2012 by anonguest

[HSvetz]

Would be interesting to see how the NASDAQ compares over those periods as that is the market for true growth stocks.

I guess the dividend returns also need to be factored in when considering the returns from investing in these indexs, especially when compounded over 16 years.

[anonguest]

Would be interesting to see how the NASDAQ compares over those periods as that is the market for true growth stocks.

I guess the dividend returns also need to be factored in when considering the returns from investing in these indexs, especially when compounded over 16 years.

Unfortunately the NASDAQ index wasnt around for the whole of the period I was talking about (1966 - present). My understanding is that NASDAQ stocks have, largely, almost negligible dividends. The S&P500 index has current dividend yield of about 2% (and was sub-1% at peak of dotcom boom). The DOW currently has a divi yield of >2.6% (and was as low as about 1% at the peak of the dotcom boom).

http://online.wsj.com/mdc/public/page/2_3021-peyield.html

[anonguest]

Unfortunately the NASDAQ index wasnt around for the whole of the period I was talking about (1966 - present). My understanding is that NASDAQ stocks have, largely, almost negligible dividends. The S&P500 index has current dividend yield of about 2% (and was sub-1% at peak of dotcom boom). The DOW currently has a divi yield of >2.6% (and was as low as about 1% at the peak of the dotcom boom).

http://online.wsj.com/mdc/public/page/2_3021-peyield.html

I stand corrected. It appears there is enough data to partly answer that question re: performance of true growth stocks during the inflationary 70's. Apart from the relatively brief decline in 73-74 that index effectively doubled by 1982 - and so fared least worst in real terms.

[200p]

2009 in the blue line

Last updated 2011 http://www.physicsforums.com/blog.php?b=488

1987 type crash

1929 type crash

As the DOW and S&P refuse to go below 10,000 and 1,000 respectfully, I can see no deflation.