Falling stock markets are a lot more bearable if you know what to expect.
So let's study a little history. Back in early 2001, the markets were in a position similar to the one they're in now, and a whiff of panic was in the air. Headlines in the Canadian business press back then show it was justified in the short term, because the ensuing bear market was long and severe.
The longer-term view from today makes all the fearful recriminations of early 2001 look almost quaint by their datedness. Here's one for you: "Research In Motion shares plummet," from Jan. 3, 2001. A couple of days later: "Research In Motion continues to spiral."
Man, investors really took it to RIM back then. On Jan. 2, shares fell a stunning $33.60 or 28 per cent to close at $86.90. Over the next year and a half, the company was pounded so hard that the shares got down below $20. A crushing blow to investors, right? Not the ones who hung on. RIM shares are up a total 2,558.8 per cent in the past five years and have gone through a pair of stock splits.
With its BlackBerry wireless e-mail device, RIM is a global franchise that is unlike almost any other Canadian company. So, no, it's not a proxy for all stocks. But the RIM experience of the past five years does serve as an example of how good stocks have a future beyond the drubbing they've undergone lately. Remember that when you see the words "plummet" and "spiral" used about something you own.
Recession worries in the United States are top of mind now, just as they were back in 2001. And just as the U.S. Federal Reserve delivered a well-received interest rate cut on Tuesday, so did it cut rates in early 2001. This explains the following headline from Jan. 5 of that year: "Fed interest rate cut a turning point for the markets."
The markets did in fact rally back then. The Nasdaq, epicentre of the unfolding tech disaster, actually surged 14 per cent in a single day. On Tuesday, the S&P/TSX composite managed a tamer but still considerable rise of 4.2 per cent.
What happened next was that the markets kept falling. Thus we have this headline from Feb. 26, 2001: "Fading Fed effect adds to gloom: Even rate cuts aren't enough to stave off bears."
It's quite likely we'll see a repeat of this headline in the months ahead. It's no big deal. Interest rate cuts by central banks work slowly to revive slowing economies, which in turn helps improve corporate profits and, in turn, stock prices. In the short term, rate cuts are to the stock market what coffee and a chocolate bar are to you when you're hungry and tired.
By early February of 2001, with the markets weakening further, the level of fear began to rise. "We are in a major bear market," a Feb. 24 headline declared. "Pessimism consumes markets," said a March 13 headline. "Selling wave swamps market," said a headline just two days later.
We're not technically in a bear market yet on the TSX, if you apply the rule that stock prices have to be 20 per cent below their recent peak. But assuming the bear does arrive, and that's one of the safer bets going right now, then expect to see the level of fear ramped up steadily.
They're unnerving, these headlines, but they're a lot easier to shrug off if you're ready for them. And shrug them off you absolutely should. The day that pessimism consumed the markets back in 2001, the S&P/TSX composite index closed at 7,930. It gradually worked its way down below 6,000 before peaking this past July at 14,646. Now you know. Stock markets fall in a bear market, and then they fall some more. It all works out in the end.
Of course, nobody knows exactly how long the pain will last. That's why we saw headlines in 2001 along the lines of this one from March 24: "Now could be a good entry point into stocks." The markets fell a lot from that point, but it was still a good entry point for someone with the patience to hang on for the big upswing that appears to have ended only recently.
Here's one last look back, this one from a very early 2001 story looking back at how badly the U.S. markets had done the previous year. "Bonds and cash the only winners," said this headline, which could apply to any bear market in any year.
Have some bonds and cash in your portfolio for sure, but don't sour on stocks just because they're plunging in value. These things happen from time to time, but they're a lot more bearable if you know what to expect.
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