Please enable JavaScript to view the comments powered by Disqus.

Investor Psychology

Diary of a Bear Market

I wrote this diary of the 1973-74 bear market for the October 1997 issue of Kip1inger's Personal Finance magazine, to mark the anniversary of the 1987 stock market crash. The cause wasn't a massive credit bubble, as is the case with the current 2007-2008 bear market. But what happened 35 years ago has much relevance to what's going on now. See if you agree...

To start, let's return to December 1972. The Dow Jones industrial average hovers at a lofty 1000. H. Ross Perot is a big player on Wall Street. Super Bowl tickets go for $15.

And we stand on the precipice of one of this century's worst bear markets, second only to the tumble that kicked off the Great Depression. The 44% slide in the Dow that began on Friday, January 12, 1973, was agonizingly drawn out, sapping everyone's patience and will. (The current bear market has seen a 40% slide, and is now in similar territory).

In reviewing what was said and what was done then, some timeless lessons emerge about the stock market and the economy.



January 11 (Dow, 1052)

A great day to own stocks. Investors, feeding on the strong economy, push the Dow up more than five and a half points, to an all-time high of 1052.

Optimism abounds. “As time goes on, the economy is becoming less and less vulnerable to big booms and big busts,” says L.O. Hooper, of the W.E. Hutton & Co. brokerage, in the current Forbes. “Competent economists, constantly more influential in government and in money management, are doing more and more to keep trends in control.”


For some time, it has seemed as if there were two stock markets: a favored few stocks and all the rest. A handful of blue chips referred to as the Nifty Fifty lead the way. Among them are McDonald's--at $74, it's selling for a staggering 83 times its earnings per share for the previous 12 months. Avon is at $133 (with a price-earnings ratio of 63). Eastman Kodak commands $148 (P/E, 47), Coca-Cola is $148 (47) and IBM is $415 (38). These are all steadily growing companies, and the thinking is that they deserve the high P/Es because their potential for growth seems limitless.

A few people are appalled at valuations for the Nifty Fifty. One of them is John Neff, the veteran value investor who runs Windsor fund.

“The whole growth-stock-multiple fad is crazy,” Neff tells Forbes. “People are just buying quality companies at any price and hanging on forever. I bought McDonald's at a P/E of 16 and sold it at a P/E of 25.” Now look at the stock, he says. “This is sheer fantasy.”

January 12 (Dow, 1039)


Business and labor leaders aren't sure they understand President Nixon's Phase 3 economic program completely, but most of them love it just the same--and see it as an invitation to jack up prices and raise wage demands.

Eighteen months earlier, Nixon froze wages and prices. Then he established guidelines and a bureaucracy to permit gradual increases.

Now, in Phase 3, those guidelines are being made largely voluntary. Many think economic controls simply delayed price hikes.

Hendrik Houthakker, a professor of economics at Harvard and a former member of Nixon's Council of Economic Advisers, observes: “What we have now is a failure, so any change is better.”


Evidence of the failure comes in a government report today that wholesale prices in December rose at an annualized rate of 19% and food prices at an annualized rate of more than 60%. Reflecting unease over the loosened wage-and-price guidelines, the Dow retreats 13 points from its high.

January 17 (Dow, 1029)

A private economist by the name of Alan Greenspan is already demonstrating his way with words: “The danger is that business may get too good too soon. Up to now there has been a strong element of business and consumer caution that has helped to keep the recovery under control. There are signs, though, that the caution is diminishing.”

January 23 (Dow, 1019)

The President declares, “We have today concluded an agreement to end the war and bring peace with honor in Vietnam and Southeast Asia.” The market, apparently unimpressed, drops 14 points.

January 31 (Dow, 999)

Inflation is worrisome. Stocks decline again, breaking the 1000 mark. President Nixon's Council of Economic Advisers predicts that the rate of inflation in 1973 will be held to 3%. (The actual rate will approach 9% by year-end.)

March 31 (Dow, 951)

Stocks are being whipsawed.

In one recent week, the Dow has dropped 40 points and losers outstrip winners by 50 to 1. The next week, it rallies 25 points in three days after Federal Reserve Board chairman Arthur Burns twists some arms to keep the banks' prime lending rate to 6.5%, instead of the 6.75% that bankers wanted

The market is now off nearly 10% from the January high, and the rise in interest rates has started to hurt.

Business Week lays much of the blame at the Fed's feet.

The magazine points out that after letting the money supply grow by 8% in 1972, the Fed is clamping down on the growth of money to quash inflation. Scarce money means higher interest rates, and this hinders economic growth.

April 12 (Dow, 964)

An ominous sign: The annual dinner of the New York chapter of the National Security Traders Association on April 27 will be “dress optional,” reversing a black-tie tradition. A spokesman explains that business is so bad in the securities industry that the group figured many would not want to part with $14 to rent a tuxedo.

April 30 (Dow, 921)

Greenspan writes in the Wall Street Journal: “Controls can't stem inflation, only fiscal and monetary policy can.” Something had better, because predictions of declining corporate profits, as well as inflation and higher interest rates, continue to subdue the market.

May 14 (Dow, 910)

The slump approaches the 15% mark, but hope springs eternal. Kidder Peabody economist Sam Nakagama says he doesn't see a recession ahead: Inflation will cool, there won't be a credit crunch, corporations' earnings will continue to climb, and the stock market will “rise to reflect these favorable developments.” Is he whistling in the wind?

May 18 (Dow, 895)

The National Bureau of Economic Research, a nonprofit organization, predicts that a recession is just around the corner.

May 26 (Dow, 931)

The struggles of H. Ross Perot--described by Business Week as “the diminutive computer-service magnate from Dallas”--typify the strains on the brokerage industry, whose business has slumped. Perot has owned the Wall Street brokerage of duPont Glore Forgan for two years. Signs of his presence are everywhere in the firm's offices, including this quotation: “The cowards never started, the weak died on the way …only the strong survived.”

June 5 (Dow, 901)

Treasury Secretary George Shultz says the prolonged stock-market slump puzzles him. Shultz insists that there are “bargains galore” to be had in the stock market now. “I almost wish I weren't in my present position so I could get my hands on some money and invest it,” he laments to a congressional committee.

June 7 (Dow, 910)

A curious new type of mutual fund debuts, based on the disappointment investors feel when their professional money manager can't beat the market averages.

Says the Wall Street Journal: “It isn't expected that the new-style portfolios, dubbed ‘index funds,’ will get a lion's share of the institutional market any time soon. The notion that the market can be ‘beaten’ is too deeply entrenched for that to happen.”

June 9 (Dow, 920)

“Fresh lobster meat hit $10 a pound in New York last week, a head of lettuce cost 79 cents and a Manhattan advertising executive moaned that his wife was spending $200 a week to feed their family of seven,” Business Week says. Consumer prices rose at an 8.8% annualized rate in the first quarter of 1973.

June 14 (Dow, 903)

President Nixon orders prices frozen for up to 60 days as a tighter system of wage-price controls is created.

Newspapers report that the reaction of businessmen, bankers and economists ranges from apathy to outright criticism.

June 30 (Dow, 892)

The Nifty Fifty aren't so nifty anymore. The glamour stocks among them are getting creamed. McDonald's share price is in a free fall--dropping to $56 from its 1973 high of $77--but its P/E ratio is still a lofty 54. Disney, which sold for 70 times earnings last December, is trading for 51 times earnings now.

August 22 (Dow, 852)

Nixon, in his first news conference in over five months, says he accepts all the blame for the Watergate scandal, but won't resign and has never considered doing so.

September 22 (Dow, 928)

In the first six months of 1973, more than 300 stock offerings were withdrawn as unsalable. Concludes Business Week: “The stream of equity capital to U.S. industry has run dry.”

September 24 (Dow, 937)

The government reports that consumer prices in August exploded at an annualized rate of 22.8%, the steepest monthly ascent in almost 26 years.

Despite that, the market is coming back, up 10% from its August low. Some begin to think the worst is over.

October 1 (Dow, 949)

Some experts are putting on a happy face again.

Writes Myron Simons, director of research at brokerage Wooden & Co., in Forbes: “The market . . . has hardly reflected at all the growth in earnings and in investment that has taken place in the past decade. Since we have probably seen the worst of our inflation with last month's staggering increase, it's time to turn bullish.”

October 6 (Dow, 971)

War breaks out in the Middle East between Israel and its foes. The press reports that corporate executives don't believe there will be more than a token cutoff of oil to the U.S. because of its support of Israel. Government spokesmen try to dispel rumors of an imminent fuel crisis as a result of Arab attempts to form a joint oil policy.

October 11 (Dow, 976)

Vice-President Agnew resigns. He cops a plea to income-tax evasion. The Justice Department is preparing to bring charges of bribery and extortion.

October 19 (Dow, 964)

Several oil-exporting nations of the Middle East cut off exports. By December the price of oil will rocket to between $14 and $19 a barrel, up from $2 to $3 a barrel a year earlier. Even so, the stock market holds firm. In a week the Dow will again be nudging 1000.

November 15 (Dow, 875)

The oil situation is now a crisis, generating fears of higher inflation and fuel shortages. And stock prices are cracking--the Dow is down 100 points in three weeks. The Wall Street Journal notes that for the first time since World War II, when German U-boats prowled the New England coast, the capitol domes of Connecticut, New Hampshire, Rhode Island and Vermont are dark at night--this time to save electricity.

December 15 (Dow, 816)

The Securities Industry Association, the brokerage industry's trade group, buys newspaper ads to boost investor confidence. One shows an investor saying, “Sure, I've got some stocks that have dropped this year. But I've got one that's grown 30% or 40%, so it's carrying the others. There’s money to be made, even in a down market”

December 22 (Dow, 819)

Ouch. The broad-based Value Line index has fallen 25% in just two months. The 30 stocks in the Dow Jones industrials are trading at their lowest P/E in 20 years, says Business Week. “Nor is there any evidence that the market has yet hit bottom--or any solid clue as to when it will. Stock-market investors will have to play 1974 by ear.”


January 14 (Dow, 840)

There's no consensus on what the new year will bring. Analysts can't seem to agree on anything, and they load down their predictions with qualifications. Says Barron's columnist Alan Abelson: “Never have so many said so much to such little purpose.”

But can you blame them? The oil cutoff is having profound economic effects, but how deep it will cut into the country's industrial muscle is unknown.

The sight of cars lined up for blocks waiting to buy even a few gallons of gasoline is unsettling. The desire of investors to buy stocks seems to be drying up with each trip to the pump.

January 17 (Dow, 872) <>

Although the economy is weakening on several fronts and interest rates continue to climb, some pundits and economic experts see a silver lining.

Says Fortune magazine in its January issue: “Despite the oil crisis, and despite the worries about severe recession, economic growth over the next 18 months as a whole will about match that of the past 18--7%.”

In fact, the economy is already in a recession, having done an impressive about-face at the end of 1973, when the economic growth rate was a torrid 5.7%.

This year and next, the economy will drop into a steep recession while inflation roars.

January 22 (Dow, 863)

Small investors, it turns out, knew what they were doing by staying away from the market in 1973. By sticking to investments such as Treasury bills and bank certificates of deposit with maturities of less than a year, they earned 8%, versus a loss of 15% in the stock market, the Wall Street Journal reports.

January 26 (Dow, 859)

H. Ross Perot proves himself one of “the weak.” After injecting a chunk of his personal fortune into duPont Glore Forgan to no avail, he puts the brokerage--the second-biggest Wall Street name after Merrill Lynch--up for sale.

April 14 (Dow, 845)

An editorial in the Wall Street Journal sums up the growing economic and market mess: “The Dow Jones average has recently been hovering around 850. It first reached that level in 1964, which means that an investor with average timing and luck has had no gain for a decade. . . . The immediate problem is high interest rates. With corporate bonds yielding 8% or even 9% . . . competing for an investor's attention takes an attractive common stock indeed.”

June 15 (Dow, 843)

The big-name, high-priced stocks continue their long fall to earth, accompanied by yet more wishful thinking that the worst has passed. A Business Week article asks the question, “Time to buy the glamour stocks?”

Avon has fallen from its 1973 high of $140 to $51 with a current P/E of 22. Coca-Cola has slid from $150 to $115, with a P/E of 31. But the bargain basement is still several floors down.

June 29 (Dow, 802)

At midyear, anyone with courage admits that nobody knows what's going on or what will happen next. Says Business Week: “Economists will remember 1974 for many things: for the squeeze on energy, for the breathtaking rise in prices and perhaps for events yet to come. But mainly they will remember 1974 as the year the forecasters blew it.”

July 2 (Dow, 791)

The Dow falls below the 800 mark. Interest and inflation rates are up, profits down. An air of resignation settles over Wall Street.

“The markets now reflect the possibility of a major financial crisis," says Business Week. “Rates on CDs and commercial paper are now so high that even when they do finally start to come down, they will still be extraordinarily attractive in comparison with sickly bonds and hazardous stocks.”

August 9 (Dow, 777)

Nixon resigns.

New President Gerald Ford vows to make fighting inflation a top priority.

“In many ways,” writes Alan Abelson of Barron's that week, "Mr. Ford strikes us as extremely lucky. . . . There's nowhere to go but up.”

But the stock market is indifferent to the resolution of the Watergate crisis.

August 23 (Dow, 687)

Kodak drops four points. Other blue chips take similar hits. The Dow has plunged 110 points during the past 12 trading days as recession, inflation and high interest rates pound the life out of the Nifty Fifty.

Coke, IBM and Kodak have dropped about 50% from their 1973 highs. McDonald's is down 60%.

September 2 (Dow, 679)

Despair abounds. A Newsweek article (“Is There No Bottom?”) asserts: “The plain fact is that there is simply not enough good economic news to sustain a real market comeback.”

October 1 (Dow, 605)


A story in Fortune titled “A Case for Gloom About Stocks” lays the blame for the bear market on inflation and says the fall might not be finished. In the course of a few months the anticipated rate of inflation for 1974 has risen from 5% to 8% and new projections are coming in even higher.

The prime lending rate of banks stands at a prohibitive 12%, and rumors circulate on Wall Street that another Arab oil embargo is in the works.

Fortune sees more gloom and doom ahead--this from the magazine that less than two years earlier had proclaimed, “The flush of robust prosperity is suffusing the economy.”

October 4 (Dow, 585)

Another down day--the 11th in a row.

In the past three sessions, the Dow industrials sank below the 600 level. Now there seems to be no bottom, and the sense of defeat on Wall Street is almost palpable.

Word on the floor of the New York Stock Exchange is that some institutional stock portfolios are for sale in their entirety.

But Friday, October 4, becomes, figuratively speaking, the last down day.

On Monday the Dow will rebound smartly, and go up again on four of the next five days.

The bear market of 1973-74 is over, 21 months after it began. At 585, the Dow industrial average is off 44% and won't regain the 1051 level set on January 11, 1973, for another eight years.

And all around lies the wreckage left by the financial storm.

You can buy McDonald's for $21 (down 72% since Jan. 11, 1973) and Coke for $46 (down 69%). If Disney was a good value when its P/E stood at 70, on this day it's a steal at only 13 times earnings. Avon, down 85%, saw its P/E plop from 63 to 9.

No longer will investors refer to such stocks as the Nifty Fifty.

For that matter, a lot of people will never dip their toe in the stock market again, and those who do stay in will bear invisible scars from this experience for decades.