Diary of a Bear Market

By Bob Frick, Senior Editor, Kiplinger's Personal Finance

October 2008

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.

1973

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.)

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