If you’re a seasoned investor, you may recall that the second most recent Great Bear market was 1973-4. The S&P 500 dropped roughly 45%. Following that bear market, we had a big rally from 1975 to mid-1976. Everything looked rosy.
But then we hit a dead patch. It was the equivalent of a sailing ship entering the Dead Horse Straits – with no wind to propel the markets in either direction. So stocks basically stagnated for six years.
Today, we may be seeing a similar scenario unfold. Between 2000 and 2002, the tech crash ushered in another big bear market in which the S&P again fell roughly 45%. Then in 2003-04, the market underwent a big rally. This year, so far, it seems to be struggling. And if we are in fact experiencing a repetition of the 1970s, it could be struggling for a while.
But the story is not that simple. In the 1973-74 decline, it was small cap stocks that bore the brunt of the decline. By some measures, they fell as much as 80%. Then in the rally that followed, small cap stocks did tremendously well. More importantly, they continued to make gains even during the Dead Horse Strait that followed, when the averages remained basically flat.
Now don’t mistake me … I’m not making a case for small caps. The 2000-02 crash was different from the 1970s in that it wasn’t small cap stocks that led the way down. Rather, as I’m sure you vividly recall, it was the technology stocks that fell some 80%.Read more...
