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Investment View

I cannot be precise as to how many bear markets I have experienced during my career, but three spring to mind. The first was in the late 1960s and was supposedly brought about by the liquidation of the IOS empire. Some of you may recall the flamboyant Bernie Cornfeld and his troupe of hard-nosed insurance salesmen. Perhaps you even took your first steps in this great industry of ours extolling the virtues of the Dover Plan. The market certainly took a tumble around that time but I do not recall it feeling particularly scary.

Not so 1974 when the bottom dropped, almost literally, out of the stockmarket. The FT 30 Share Index, then known as the Industrial Ordinary Index, had peaked in 1972 but only really started to fall out of bed in the aftermath of the Yom Kippur war in the autumn of 1973 and the subsequent quadrupling of the oil price. The next year, 1974, brought us the three-day week, the fall of the Heath Government and the steady attrition of share values. On the first business day of 1975 the Index hit an intra-day low of 145, representing a fall of around two-thirds from its peak. Within three months the stockmarket had doubled with confidence back in buckets, even if inflation had risen to more than 20 per cent.

In 1987 it was the speed, rather than the extent, of the market&#39s fall that took people&#39s breath away. On Black Monday – October 19 – Wall Street lost nearly a quarter of its value in a single day&#39s trading. Indeed, the bear market was effectively compressed into two short, mind-numbing weeks – even if the shock was such that it took more than a year for confidence to return. Volumes were thin in 1988. Many who had been enticed into the market by cheap privatisation issues fled, never to return.

One common thread among these upsetting periods of market trauma is the fact that share prices always over-react. Indeed, they over-react on the upside too. In the case of the technology bubble, which reached maximum inflation a little over a year ago, the over-reaction seems to have been considerable. But at least you know that the market will overshoot on the way down, as well, even if trying to guess the bottom can feel like trying to catch a falling knife.

Does this reflection on bad times past mean I consider we are now in a bear market? It depends on your definition of what constitutes such a market trend, but we are most certainly in a bear market in Nasdaq stocks and in technology. According to the Americans (who like to be precise about these things) a market is in a bear phase when it has retraced 20 per cent from its peak. This means that the S&P 500 entered a bear phase last week, while the FTSE 100 was certainly flirting with the bears and, for all I know, may even by now have become a fully paid-up member of their club.

I find it strangely comforting to find that the market has retrenched so comprehensively. It makes valuation levels so much less demanding for a start. The only worry is that often you do not learn until after the event what it was that the market anticipated. True, we have the US slowdown to contend with, but that will be dealt with through President Bush&#39s tax cuts and Alan Greenspan&#39s rate reductions, won&#39t it?

Then again there is Japan. Thinking back to the end of the 1980s, when the Nikkei Dow made a stab at breaking 40,000, it is hard to imagine why we were not truly sceptical over the unstoppable Japanese economy. This begs the question as to whether technology and the Nasdaq will take as long to regain their poise as the Japanese market. Fortunately for the new economy, they are not as opaque or as politically inept as the sons of the Rising Sun seem to be. Meantime Mrs Watanabe continues to suffer in most domestic investment markets. I hope tech investors are let off more lightly.


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