There have been
three major bull markets in the past 80 years, and each one has
ended in a technology-driven bubble. In each case, stocks moved
up too far too fast, aided by borrowed money and greed. When the
technology bubble burst in the mid-1960's, a long sideways market
followed. By the summer of 1982, TIME magazine featured an article
concluding that the stock market was like a "Roller Coaster
to Nowhere." It stated that the Dow Jones Industrial Average
was 1000 in early 1966, but only 760 in August 1982. It had become
clear by 1970 that investors needed to follow a different investment
approach - one that selects the right sectors at the right time.
Stocks do not move
straight up or straight down but, instead, they move in waves
or cycles. When a recession ends and a new economic expansion
begins, as it did in the early 1960's and 1990's, stocks oftentimes
enter a long uptrend. During these periods, stocks move two steps
up and one step down for many years. This is called a secular
bull market and is a time when a "buy and hold" approach
works well. The counter-moves or declines along the way are called
cyclical bear markets and are usually shallow and end quickly.
Before long, stocks continue their advance, moving above the previous
high point into all-time high territory. Once greed takes over
and stocks soar to unreasonable levels, the market is said to
have entered a "bubble." And once the bubble bursts,
as it did in 1968 and again in the spring of 2000, stocks begin
a long, drawn-out decline.
Following a bubble,
stocks begin to move one step up and two steps down. This is called
a secular bear market and usually lasts many years before the
excesses and high debt levels are eliminated. Occasionally the
downtrend is interrupted by cyclical bull markets, which can be
very profitable for those invested in the right sectors. The most
recent secular bull market began in 1982 and lasted 18 years.
Once the "tech bubble" burst in early 2000, stocks moved
sharply lower and entered a new secular bear market. Those utilizing
the "buy and hold" approach of the 1990's have experienced
significant losses. Today's investors would benefit from eliminating
many of the overvalued favorites of the 1990's and moving toward
the sectors that represent new leadership. Most likely a new cyclical
bull market has begun, but beware, it could end sooner than expected.
