Friday marked the 1001st day since the Dow Jones Industrial Average touched its all-time high at 11908.50 on Jan. 14, 2000. 1,001 days was the precise duration of the bear market that followed the peak of Sept. 7, 1929 — which included the Great Crash and ushered in the Great Depression.
Friday night began — dare I say it — 1,001 bearabian nights, and Monday morning will mark what will be then the longest bear market in history.
Or maybe the lows made on Thursday will be The Bottom, at only 1000 days. That will leave the great bear market of 1929-32 as the worst of the worst — by one day. I like leaving that record intact — it’s kind of like retiring the jersey.
But leaving sentiment aside, I hope Thursday was The Bottom simply because I’m sick and tired of this bear market. As this 1,001st day dawns today, the Dow has lost 36.7% since its 2000 peak. The S&P 500 has lost 48.2% since its peak on March 24, 2000 — 931 days ago. And the NASDAQ has lost 77.3% since its peak on March 10, 2000 — 945 days ago.
The Dow did even worse than that in the 1929-32 bear market, losing 88.3% from peak to trough. The S&P 500 lost 86.8% then. The NASDAQ’s huge losses in the current bear market invite comparison with the 1929-32 debacle, and by now everyone has surely seen the oft-published chart overlaying the NASDAQ today on the market then. At least superficially, the comparison in magnitude, duration and pattern is striking.
In the 1929-32 bear market, stocks were discounting the Great Depression. Today, stocks overall aren’t discounting a depression, Great or otherwise — they are discounting much slower growth than the economy enjoyed in the 1990s. But the NASDAQ is discounting a Great Technology Depression. And that will have important spillover effects into the overall economy.
Technological innovation and technology adoption is the primary driver of productivity growth in almost any company. Today’s anemic pace of new orders in technology capital goods means that the productivity “miracle” of the 1990s has been aborted. That hurts technology companies directly, but it hurts companies that use technology, too. Without continuing new investment in technology, companies won’t even be able to reap the full rewards of the technology investments they’ve already put in place.
Stocks overall are also reflecting an extraordinary level of fear and uncertainty. As we’ve pointed out several times in this column, undervaluation relative to bonds is as extreme as it’s ever been — even more extreme in the direction of equity undervaluation than it was in the direction of equity overvaluation in March 2000. Other reflections of extreme fear include the near-record levels of implied options volatility reflected in the Chicago Board Options Exchange’s Volatility Index; a virtual shutdown in initial public offerings, making Thursday’s two IPOs the only ones in two months, and greatly expanded credit spreads in bond markets.
Expectations for slower growth and extreme levels of fear are tangled together today in complicated chicken-and-egg ways. Sufficiently powerful growth expectations can inspire even terrified investors to show some courage. But fear itself depresses growth expectations, because superior growth is the result of taking risk on innovative ideas.
In some ways the path to today’s 1,000-day bear market is quite similar to the one we walked in 1929-32. Back then, the passage of the Smoot-Hawley Tariff Act and a series of increases in federal income taxes slammed the brakes on an economic boom, and stocks quickly began to discount diminished growth expectations. In the case of today’s bear market, stocks have had to discount the effects of botched regulation of telecommunications, antitrust persecution of technology giants and now the criminalization of corporate management through the Sarbanes-Oxley Act.
But what’s different this time is that now we have an activist Federal Reserve that sees it as its duty not only to manage monetary stability, but to fine-tune the economy as well. More than anything else, it has been Alan Greenspan’s misguided attempts to control stock prices to rein in “irrational exuberance” that have triggered this bear market. There really should be no dispute about this: It was an obvious, conscious, calculated direct attack on stock prices themselves. The crash of stocks prices wasn’t an accidental by-product of that policy — it was the objective of that policy.
To be sure, Greenspan denies it. In a highly publicized speech in August he expressed regret that he hadn’t dared to do anything to avert the putative stock-market bubble of the late 1990s, saying it couldn’t “be preempted short of the central bank inducing a substantial contraction in economic activity.” The market has fallen steadily ever since that speech, and signs of fear and uncertainty have steadily increased, because — to put it bluntly — Greenspan’s statement was a bald-faced lie. He set out to burst the bubble, and he did just that — by “inducing a substantial contraction in economic activity.”
All along, in speeches and Congressional testimony, Greenspan denied that he was “targeting stock prices.” But when he started relentlessly jacking up interest rates in 1999 and 2000 as the equity markets soared, this was in fact precisely what he was doing — though he found a rationale that allowed him to justify himself in terms of traditional inflation-fighting objectives. Greenspan’s rationale was the “wealth effect” — the common-sense idea that people may tend to spend more when their stock-market investments show gains. Greenspan stretched that simple idea to assert that with stock prices having appreciated so much in the 1990s, the wealth effect was causing an “excess of the growth of demand over supply” (see Greenspan’s Congressional testimony in July 1999). Presumably we were to believe that when people demand more than can be supplied, prices rise, and inflation is the result.
Thus an argument that begins with high stock prices ends up being about inflation — and inflation is something that the Fed is supposed to be doing something about. Unfortunately, at that time there was no objective evidence of inflation or inflationary expectations — other than Greenspan’s theory that high stock prices would lead to inflation. Indeed, all the evidence at that time was of raging deflation — reflected clearly in collapsing commodities prices and a soaring U.S. dollar.
Greenspan’s idea of the “wealth effect” started showing up regularly in Federal Open Market Committee statements in 1999. Neither the “wealth effect” nor the equity market was ever mentioned directly — the statements typically used such language as “…the growth in demand has continued to outpace that of supply…” (see FOMC statement of Oct. 5, 1999). The last time that language appeared was in the FOMC statement of May 16, 2000, documenting that infamous meeting in which the fed-funds rate was raised for the final time, to 6 1/2%. By then the NASDAQ was already a goner, and the rest of the market was soon to follow.
The “wealth effect” and its “excess of the growth of demand over supply” was never mentioned again in an FOMC statement. But it did find its way into the introductory paragraphs of Greenspan’s recent August speech. Infuriatingly, there Greenspan casually mentions that the “wealth effect” isn’t, in fact, operating in the economy after all. “The massive drop in equity wealth over the past two years…might reasonably have been expected to produce an immediate severe contraction in the U.S. economy. But this did not occur.”
This kind of intellectual dishonesty tells the market that future policy decisions will be made without principle — that they will be arbitrary, whimsical, unpredictable. Who would want to make long-term investments knowing that our central bank could, at any moment, reduce their value by 77.3%? That has transformed the extreme optimism that characterized the stock market and the economy in the 1990s into a symmetrically extreme pessimism and fear.
The NASDAQ is now 10.5% lower than where it was when Alan Greenspan first spoke of “irrational exuberance” on Dec. 5, 1996 — even though the NASDAQ’s earnings are now 21% greater than they were then, and both short-term and long-term interest rates are far lower. The S&P 500 is only 8.0% higher than it was on December 5, 1996 — even though its earnings are now 37.5% higher than they were then.
I was always skeptical when the media called the equity surge of the 1990s Alan Greenspan’s bull market. But there’s no doubt in my mind that this bear market is all his.
