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Is The Brutal 1,000-Day Bear Market Finally Behind Us?

By Marc Davis, Managing Editor
November, 2002

Could one of the longest bear markets of the last century finally be over? It certainly seems to be the case after the Dow Jones Industrial Average made a dramatic about-face in October. After hitting a low of 7,286 points on October 09, the Dow roared back with a 1,000-point-plus gain by month's end (up nearly 16% in value from its low). And November has been off to a flying start, too. Moreover, these impressive gains have come hot on the heals of one of the Dow's worst ever beatings for the month of September, when it dropped 12% in value.

So what's going on? Why has the panic selling of September and early October turned into a sustained rally? Well, it seems like a profound shift in market sentiment has taken place. Recently, investors have been encouraged by the easing of the threat of an imminent war with Iraq. And better-than-expected results from the last round of Q3 corporate earnings have also diffused much of fear of a double-dip recession. Even relatively bad economic data is now being largely shrugged off by investors. Specifically, the markets have been selling off on weak economic news but have been recovering just as quickly. In a nutshell, the markets now appear to be forward-looking, which signals a fundamental shift in investor psychology. The prospect of a solid economic recovery in 2003 seems tantalizingly close at hand. And that's music to the ears of weary investors.

But let's try to put into perspective the long shadow of the scowling bear that's been hanging over the global markets for over two and a half years. This secular market downturn technically began on January 12, 2000, after the Dow peaked at 11,722 points. Factoring in that 2000 was a leap year, then the market bottom of 7286 points on October 09, 2002, lasted exactly 1,000 days. By comparison, the bear market that triggered the Great Depression -- which commenced on September 03, 1929 -- only outlasted this bear by a mere 38 days. Not surprisingly, the technology-driven bubble of the late 90s was as extreme as anything seen the 1929 market crash. Fortunately however, the Big Board's most recent 38% decline was nowhere near as devastating to investors as its 89% meltdown between September, 1929 and July, 1932.

Interestingly, what's been so historically anomalous or secular is this bear market's reluctance to respond to economic stimuli. Since the 1920s, the stock market has always turned upwards within six months of the end of a recession. This time around, this did not prove to be the case. Historically, the market has always responded within 12 months to the aggressive cutting of interest rates by the Federal Reserve. Not this time around. It has taken more than a year and a half for such cuts to galvanize investors. So, posterity will reveal this to be a bear market that defied the odds and befuddled market pundits. And this may largely account for its long duration, with so many confused investors waiting on the sidelines for a clear signal that it is safe to get back into equities.

Anyway, that long-awaited signal seems to be shining brightly now. Even the badly-battered, tech-heavy NASDAQ Composite index was up nearly 10% in October, while the Standard & Poor's-500 stock index followed suit with a 9% bounce. And European stock markets made solid gains, too. So, the bad news for investors is that the opportunity to pick up quality stocks at fire-sale prices may have come and gone. But it's certainly not too late to buy into undervalued equities that are still in the first leg-up of a new bull market. However, here's a word of caution before you phone your stockbroker. While recovering lost ground, the Dow and other major indices are likely to experience some whipsaw corrections in the coming months. This can be a nerve-jarring reminder that this business is not for the feint of heart. So, pick your stocks wisely and buckle up your seat belt.