February 25, 2021

Four major Bear Markets and two World Wars

Last Updated Monday, 06 December 2010

The death of Business, Finance and of Equities? OR

The Greatest Buying Opportunity of the Last 60 Years???
a) Since 1900 the world economy has experienced four major bear markets and two world wars.

(i) The 2008-2009 Housing and Financial Bear market: The world index had fallen 53% until the end of 2008 and added over 20% in the first two months of 2009.

(ii) The 1931-32 bear market :characterized by serious economic policy mistakes in the pre-Keynesian period. At the start of the great depression stock prices retreated by 54%.

(iii) The 1973-74 Oil shock : Stock prices decreased by 47% around the world.
(iv) The 2001-2003 Technology bubble: the bear market led to price decreases of 44%.

(v) By contrast during the two world wars the corresponding stock price decreases were 18% (1938-48) and 12% (1914- 18) respectively.

All these episodes were associated with serious recessions and in the case of 1930’s with the great Depression (about 25% unemployment and 50% drop in GDP). It is very interesting to note that in contrast to the present, in all previous bear markets stock valuations were overstretched at their start.

During the last ten years we have experienced two major bear markets. Moreover, the recent bear market, despite the attractive valuations at its start, is the worst since 1900! Hope we are luckier in all other activities !

It is reasonably for existential questions to arise. Is the capitalist system, as expressed by A. Smith, dead?

J.M.Keynes accepted that during certain periods the economy might experience unstable equilibria below full- employment and government intervention might be needed. But is this refined model that created enormous wealth in the post world period also dead? The alternative systems have either created misery and have collapsed several years ago (socialist) or proven to create serious instabilities (unregulated free market).

If business, finance and equities disappear, then life on earth will be different. There is always a first time in history but is this really the end of the world? But do we live in a world where there is no place to hide or do we have the great opportunity to buy superior global companies at stock bargain prices?

Is the long-term case for stocks still valid? The historical risk premium of 5% over the treasury bills

will make an investor about four times more wealthy by investing in equities instead of treasury bills every thirty years. If the rate of overperformance of stocks drops to 3.5% the doubling of wealth will occur every twenty years. Historical evidence suggests that after a dismal decade (the last one was the worst in history) a recovery of at least 150% in the next decade takes place.

Best Wishes and Best of Luck on the issue of portfolio allocation under significant uncertainty! Individual attitudes towards risk should guide each one to the best

Personal Solution!

N.Ritsonis

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