ECONOMIC AND SECURITIES MARKETS OVERVIEW August 2003

 A secular bear market is characterized by below average stock market returns as characterized by the S&P 500 for a long time, typically ten to twenty years. On the other hand, a cyclical bear market typically lasts from a few months to a year. The duration of the last four cyclical bear markets was short. A cyclical bear lasted three months in 1987, four months in 1990, ten months in 1994, and two months in 1998. The current bear market has lasted longer than these four combined. Listed below are stock market returns during different types of markets as described by the secular (long-term) bear and bull markets.

The 1966-1981 secular bear market, adjusted for inflation, represents a loss of 0.9 percent per year. However, during this time frame, stocks did not plummet the entire time. During this secular bear, the market experienced many cyclical bulls. For example, in 1971 and 1972, large stocks posted positive returns if 14.3% and 19.0%, respectively. This, of course, was followed by a (14.7%) in 1973 and (26.5%) in 1974.

Similar examples have occurred in Japan. In addition, during its thirteen-year bear market, the Nikkei experienced fifty rallies of more than fifteen percent. Four of these rallies were in excess of thirty percent. These false starts were ignited by fiscal policies to stimulate the economy, cutting interest rates, and adopting yen weakening policies. These strategies failed to help Japan due to the overcapacity that developed during their bubble years. Infusing the economy with money did not help Japan.