It is said that history doesn’t repeat exactly but that sometimes it rhymes. And while no one has seen a subprime crisis before – due primarily to the simple fact that the type of securities responsible for the debacle haven’t existed very long – we HAVE seen this type of market before. So for those of you baby boomers out there, welcome back to the 1970’s.

So go ahead; grab your bell bottoms and your tie-dye t-shirts, and then dig up those vinyl recordings of The Band, Crosby, Stills, and Nash (Young came later), The Grateful Dead, Janis Joplin, Santana, The Rolling Stones, Jimi Hendrix, and The Who, because we’re betting that what was old is about to be new again.

I started in this business in the spring of 1980, just about 8 months after Business Week’s now legendary cover story had been run entitled “The Death of Equities.” The point to the article was that inflation was destroying the stock market. And after nearly a decade of stocks having gone nowhere, investors had given up.

The now famous article was actually prompted by a ruling on July 23, 1979 that allowed for a more liberal interpretation of the Labor Department’s “prudent investment rule” that, up until that point, had restricted pension managers from investing in anything outside of listed stocks and high grade bonds. However, the new rule afforded pension funds the opportunity to expand their investment horizons into small company stocks, real estate, commodities, and even gold and diamonds.

According to the article, “The Labor Dept. ruling is just one more in a nearly endless string of unhealthy things that have happened to the stock market over the past decade.” Hence, this was the intended reference for the issue’s title, “The Death of Equities.”

While no one is talking about equities going away as an investment alternative at the present time (on the contrary, equities are being issued at a record pace in the banking sector), it is worth noting the similarities to the present market to what we saw during the 1968 – 1982 period.

Welcome to the Secular Bear

Our guess is that most stock market investors and mutual fund owners still have a pretty good overall feeling about the concept of investing in stocks. After all, the 90’s were a pretty darn good time to have money in the market. However, since the turn of the century, it’s been a different story.

As we’ve noted a time or three, for the ten years ending 12/31/2008, the Lipper Large Cap Growth Fund Index sported a total return for the period of -34.27%. And in case this number doesn’t make things perfectly clear, anyone deciding to invest money into a growth fund at the beginning of 1999 (which wasn’t a bad first year) is looking at an account that, as of Friday’s close, still needs to gain about 33% or so in order to return to where it began.

And if you were unlucky enough to jump into the then roaring market in the summer or fall of 1999, well, all we can say is, “ouch.”

Which brings us to the reference to the 1970’s. The period of 1968 through August of 1982 was the last time we experienced a secular bear market. While my trusty chart from eSignal only goes back to early 1970, one glance at the graph below illustrates the fact that the DJIA effectively went nowhere for a very long period of time.

The Dow - 1970 - 1980

As a card carrying member of the glass-is-half-full club, it would be all too easy to suggest that in light of the fact that the market has gone nowhere now for the past 11 years, stocks ought to be ready to begin a new secular bull market; where we could expect to see many years of double digit gains or better ahead.

Unfortunately though, this is not the case. While I fully recognize that I’m repeating myself here, it is important to understand that what currently ails the market as well as the economy, is not likely to be rectified in short order. This isn’t an emerging market meltdown or a stock market crash driven by computers gone wild. No, there are factors at work here that are likely to stick around a while and/or take time to remedy.

For example, the debt in the system has reached outrageous proportions and unfortunately continues to grow daily as the government has decided that the best way to out of a debt debacle is with more debt.

Politics aside though, the key point is that a great many Americans have a debt load from their mortgages, overspending, etc., that is likely to crimp their spending habits for some time to come. Couple this with corporate America being put on a debt diet and a more cautious stance in general by both consumers and CEO’s alike and well, the good times aren’t likely to roll any time soon.

Dealing With What Is

While we recognize that this isn’t exactly cheery stuff, let’s get back to the task at hand – managing the market. The trick to making money over the long-term in any market is to deal with the market you have instead of the one you want or worse yet, the one you hope for.

The point is that there are always ways to make money in the markets – as long as you can understand and identify the type of market you are dealing with. So, given that we’ve got a “mini bull” market happening within the context of secular bear market, let’s get to it.

If we look back to the 1974 – 1975 period, which is eerily similar to what we’ve got on our hands now on many fronts, we can see that stocks bottomed and then embarked on a monster rally, which took the Dow up something like 74% over a period of about a year and a half. So, if history is to repeat, we’ve got some upside left in this “mini bull” yet.

However, there are a couple things to remember. First, Wall Street tends to overshoot in both directions. And after overshooting to the downside in March 2009, it is a fairly safe bet that we will overshoot to the upside if the economy starts to shows actual signs of recovery.

Which brings us to our second point – the rally into 1975 ushered in the next bear market, which shaved a quick 25% off the DJIA. Thus, if you are not prepared to play some defense, you will wind up negating the fun in the sun from the current “mini bull.”

So, while we do NOT expect history to repeat, we DO expect to see a similar trend from a big picture standpoint. Thus, it makes sense to take a more active role in your investing than most have done in the past. But if you disagree and deicide to continue to simply “buy and hold” those plain vanilla stock funds that everyone loved in the 1990’s, well, at least you’ve been warned.

Wishing you all the best for a profitable week ahead,

David D. Moenning
Founder TopStockPortfolios.com

Positions in Stocks Mentioned: None

 

The Week in Review   Week Month YTD Dow Jones Industrial Average +0.41% +3.52% +0.26% S&P 500 Index +0.65% +2.95% +4.76% NASDAQ Composite +0.51% +4.73% +17.87%

 

TSP Chart Review
S&P 500	NASDAQ

 

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