If you felt like you were living through stock market history over the last year, you were right.
It is a truism of technical analysis that all bear markets at some point break their downtrends, the main trendline beginning at the peak that marks the progression of a bear market. The only exception to that rule, in all of recorded market history, was the great 89% decline in the Dow and S&P from 1929-1932.
Until now. That’s right; the Nasdaq has never broken its main downtrend line in this bear market. In fact, the index could clear 3000 and still not break it.
Here’s a chart of the great bear of 1929:
And one of the Nasdaq over the last year and a half:
Even the great bear markets of recent years, the Nikkei of a decade ago and the Hang Seng in 1997, broke their downtrends.
Here’s a chart of the Nikkei’s decline; note how the index broke its downtrend in its first big rally before heading lower:
So what should investors draw from this? Hopefully, not much. It may just be that the first great bear market of the Information Age happened so fast that the Nasdaq never got a chance to break its downtrend. News is discounted in financial markets so rapidly nowadays that it’s likely that the speed of the Nasdaq’s descent was due in part to electronic trading and the rapid dissemination of information.
But it’s also possible that the Nasdaq’s failure to break its downtrend at its September 1 peak was a sign of deeper structural problems that could take time to work out.
That’s not to suggest that the U.S. economy from 1995-2000 was anything like it was in 1925-1929. In the boom years of 1925-1929, banks failed at a rate of two a day, and that was during the good times. At the market peak in 1929, 30% of all stock holdings were on margin; margin debt is about a tenth of that level today. The U.S. economy of the 1920s was a house of cards destined to crumble. Chances are remote that the U.S could experience anything like the 25% unemployment it did in the 1930s.
But the Nasdaq boom of 1995-2000 shares other traits with the roaring 20s. Both eras were marked by extraordinary innovation and excitement about new technology. In the 1920s, appliances, radio and the widespread ownership of automobiles were going to change the world. In 1995-2000, it was the Internet that generated all the excitement. But there too the advantage appears to go to our current age: the innovations of the 1920s were aimed squarely at consumers; the Internet has provided businesses with lasting gains in efficiency and production. Indeed, if not for the extraordinary technology-driven productivity gains of recent years, the economy likely would already be in official recession. The Federal Reserve understands this, and that’s why it has overtly targeted business investment with interest rate cuts.
But every era of rapid technological innovation brings with it a measure of overinvestment in the emerging technology, and ours has been no exception. For example, Susan Kalla, an analyst with BlueStone Capital who correctly called the top in the telecom equipment sector last fall, counts 1700 service providers and carriers in the U.S. Out of more than 400 long-distance companies, CLECs, and metropolitan service providers, she expects only one-third to remain standing two years from now due to consolidation. If that happens, business could be tough for telecom equipment providers for some time to come. With more than 50 start-ups in the optical equipment sector alone, there could be substantial consolidation in even the hottest sectors.
Combine the high level of investment in new businesses and technology with the high level of consumer debt, and it’s easy to see why the economy has been slow to respond to the most aggressive Federal Reserve rate-cutting, on a percentage basis, in the institution’s 88-year history.
With the lone exception of 1929-1932, every time the Fed has embarked on an aggressive course of rate-cutting, both the stock market and the economy have revived, so investors betting on a strong rebound have history on their side. ‘Don’t Fight the Fed’ is a saying well worth committing to memory. But it sure has been a bear market to remember, evidenced by the fact that, if only on the technical side, it has only one historical parallel.