No More Bull?
The stock market is showing signs of wear and tear. It's time to play defense
For investors who came of age in the rip-roaring '90s, the long, frustrating years that followed the bursting of the Internet bubble have been marked by one tough lesson after another.
Investors found out the hard way in early 2000 that stocks can lose money. And they discovered during the bear market years of 2001 and 2002 that stocks aren't the only investments that can make real money, as housing prices shot through the roof.
Now, a little more than five years after the stock market peak of March 2000, folks who have been frantically trying to make up for lost ground are learning something new: Bull markets don't always have long runs, as they did in the 1980s and 1990s. "Investors have a misconception--possibly a dangerous misconception--that bull markets last six or seven years or more," says Jim Stack, editor of the InvesTech Market Analyst newsletter. Only three out of the past 15 bull markets have lasted five years or longer, with the average surviving only 3.4 years.
Yet even that's distorted by the longevity of the 1990s bull. The median length of a bull market--the statistical point where an equal number last longer or shorter--is only 2.6 years.
Guess what? The current bull market, which began in October 2002, is 2 1/2 years old. And it's showing its age. Since early March, the Dow Jones industrial average has fallen about 900 points on fears over inflation on the one hand and a softening economy on the other. Last week, a government report showed that orders for big-ticket items like cars and washing machines fell 2.8 percent in March, the biggest drop since September 2002. Add that to recent weak readings from surveys of consumer moods, and it's another sign that the almighty consumer is pulling back. So far, investors are following suit. "The risk premium in the market is rising," says Chris Orndorff, head of equity strategy for the asset management firm Payden & Rygel. "In other words, investors are becoming more aware of risks that they knew were there but had been a bit complacent about."
This is evident in the types of investments that have been hit hardest in the recent correction. Technology stock funds, for example, have been the worst performers so far this year, losing 12 percent of their value on average. Growth-oriented investments have also been rocked, as have industries such as online retailing, banking, and semiconductor manufacturing that follow the economic cycle. Meanwhile, companies considered defensive investments, such as healthcare--which do well in mediocre economies--have outperformed. This is a classic sign that the bull is in the sunset of its life. And here's the really bad news: "There's nothing you can do about the aging of the bull market," says Sam Stovall, chief investment strategist for Standard & Poor's.
But there are things investors can do to prepare for the transition. Start by throwing out every last vestige of new-economy think. Older bull markets require old school concepts--tried and true and, yes, boring: Save more, diversify, and learn some patience. "We got used to cheap, easy returns whether they were in stocks or other assets," says Colorado Springs, Colo., financial planner James Shambo. But going forward, he adds, "don't expect 10 percent annual returns in any asset."
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