GBC members attending the GBC’s Business Outlook 2009 on Nov. 3 got a dose of perspective from highly regarded investment analyst Richard Cripps. At this point, the stock market crash of 2008 ranks as the 9th worst bear market since 1900, he said.
Cripps, chief investment officer for Stifel Financial, noted that the average decline for severe bear markets is 47 percent – except for the 1930s market crash – and the average one-year recovery from the bottom of those bear markets is 40 percent.
“So the current good news is, typically or historically, these periods are followed by the most robust gains the market provides,” said Cripps, noting that from a risk-reward standpoint, it’s a good time to invest.
But investors aren’t thinking about risk-reward at the moment. “They’re thinking just fear,” Cripps said. “They’re pulling in, they’re back in the cave” because they’re haunted by the “elephant in the room,” the depression of the 1930s which saw the Dow Jones average lose 89 percent of its value between 1929 and 1932.
There are significant differences between the Great Depression and the decline and crash of 2007-2008, Cripps noted. For instance, stock prices were up 400 percent prior to the 1929 crash. But at its October 2007 peak, stocks were up only about 50 percent from levels six years before; and up 100 percent from the bear market low in 2002.
Also, the speculative fever in the 1920s was in stocks themselves, which could be purchased on 10 percent margins. But the speculative fever was elsewhere – in real estate, mortgages, and commodities – leading up to 2007-08.
This time around, the stock market “was a casualty of what was occurring elsewhere. The stock market wasn’t the cause,” Cripps said. “It was really the risk and what was occurring in these other various markets, and that’s an important distinction.”
“The reality is that we’re probably looking at a nasty, significant bear market,” he said.
Rebuilding confidence in the stock market will start with stability, particularly a reduction in volatility. Cripps pointed to two immediate factors that could help erase some uncertainty – getting past the third quarter earnings reports and the Nov. 4 elections, which “will remove uncertainty, no matter who.”
Cripps pointed out that typically, the stock market will bottom before the economy bottoms and before lagging indicators, such as GDP, consumer confidence and unemployment data improve. “Keep in mind that the stock market is looking ahead and typically will turn up well, well before that.”