This bear just doesn't stop growling!

In a previous article last year, I talked about the value the market offered to investors after the bear run, since March 2000. Following that we had the September 11th atrocities, which sent markets plummeting and then there was Enron. More recently we have Worldcom, and a number of other large US companies having their accounting procedures closely scrutinised. The US being the worlds largest market has knock-on effects on the world economy and hence world markets. Indeed, as I write many of the world's main stockmarkets are at 5-year lows. Where will it all end? More importantly when will this bear run begin to turn around so that investors can start to see gains once more.

The bear market conditions affecting global markets over the past two years have left many investors wary and cautious, sitting on the sidelines. The more badly burnt consider cashing out and calling it a day, and unfortunately succumb to the inexperienced investors greatest mistake - the old "buy high, sell low" strategy. History shows that this could be the biggest mistake of all.

If we look at equity markets since WWII, there have been 9 bear markets during which the US market fell by over 20%. What makes the 2000/1/2 bear market feel so unusual is the fact that the bull market of the 1990's lasted longer than any other in the 20th Century. For many investors, bear market conditions are being experienced for the first time or time has dimmed the memory of the last.

The table below lists the 9 post war bear markets, showing their severity, speed of fall, and recovery time. In this historical context, current conditions are no worse than the average in terms of the amount of reduction in the market, but in terms of longevity, we have been in a bear market now for 27 months, which is far longer than the average.

US Bear Markets 1946-2002 Date Total decline Months to Reach Bottom Months to Recover to previous High May '46 - Jun '49 -30 37 12 Aug '56 - Oct '57 -22 15 11 Dec '61 - Jun '62 -28 7 14 Feb '66 - Oct '66 -22 8 7 Nov '68 - May '70 -36 18 22 Jan '73 - Oct '74 -48 21 70 Nov '80 - Aug '8 -27 21 3 Aug '87 - Dec '87 -34 3 20 Jul '90 - Oct '90 -20 3 4 Mar '00 - present -23 (so far) ? ? Average -29.5 14.7 18.1

So, what is the prognosis if you're not currently invested? Do you 'market time' and sit on the sidelines waiting for the market to turn? As I outlined in a recent article, this market timing approach can be very risky and many professional and most amateur investors get it wrong more often than right, but this still doesn't stop many from trying. Markets recover very quickly from major losses and once market sentiment has reversed, equities often regain previous highs in less than a year. Few investors move fast enough when markets turn and most will wait for a new up trend to be established. This next table shows the gains that can be missed if you were to miss the bottom of the market by just a few weeks. The smart investor, sensing that the bottom of the market is near, 'averages in' and will spread his investment over several weeks or indeed months, therefore guaranteeing an average entry level close to the bottom of the market.

Date of Bear Market Low Equity Market Return (%) in the 20 Trading Days Following Low 13 Jun '49 7.8 22 Oct '57 2.4 26 Jun '62 7.9 7 Oct '66 10.4 26 May '70 7.9 3 Oct '74 18.7 12 Aug '82 18.1 4 Dec '87 15.5 11 Oct '90 4.1 Average 10.3

Next, the long-term investor who has ridden the downturn, and sweated it out waiting for recovery. These investors should take solace in the fact that equities remain the most suitable investments and that the worry caused by recent months will fade into insignificance with the benefit of hindsight. Once again, if we turn to history to predict the future, you will be surprised at how well even the unluckiest long-term investor can do. This last table shows how the word's unluckiest market timer would perform over a series of ten year terms ie the annual returns if he made the worst possible investment decision and chose the day the market reached its highest point before the fall to invest. The average annualised return is a fraction under 10%, hardly disastrous for a 'worst case' scenario and a comforting statistic for investors who chose the first quarter of 2000 to invest.

Date of High Preceding Bear Market Annualised Return Over Next 10 Years (%) 29 May '46 15.1 2 Aug '56 9.0 12 Dec '61 6.4 9 Feb '66 4.1 29 Nov '68 2.6 11 Jan '73 6.9 28 Nov '80 13.3 25 Aug '87 13.9 16 Jul '90 17.9 Average 9.9

So, where now? By the time you read this, the markets may be recovering and the next bull run under way or, alternatively the bottom of the market may be yet to be seen. The historical data in this piece shows that when markets turn following a bear market, they do so quickly and present opportunities that cannot be ignored. Now is the time for the smart, long-term investor to be moving out of cash, not out of the market!

Ivan Doherty
ipd@ifg-asia.com

Ivan Dohety MLIA (dip) is Chief Operating Officer of IFG Asia. Part of The IFG Group PLC and registered with the Ministry of Finance in Japan to give investment advice.

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