In 2022, the stock market has receded massively. The S&P 500 had shaved off 27% at its lowest point to date, and historically only 1.6 out of 10 times has a NASDAQ Composite bear markets declined further and longer. I expect even lower prices in these indices over the next months.
The media love drama
Severely declining markets paired with negative economic sentiment such as seen now always encourage the financial media to stoke the fire of fear.
Over the course of this bear market, the spectre of the ‘lost decade’ was raised by many news outlets, including the Wall Street Journal and Barron’s. A lost decade occurs when the major market indices undulate in a range of prices for about a decade or longer, neither going too far up nor too far down. This effectively locks up the money of those types of speculators that track the markets closely via passive instruments (ETF), via focus on blue-chip companies, or via the average mutual fund for this time with minimal or null profits.
Fund managers are stepping forward to declare their expectations of decade-long bear markets, and stagflationary environments to come. Doomsday predictions abound, while the eminent Stanley Druckenmiller slated equity markets with a high probability of showing zero returns in a decade of flat markets.
Unsurprisingly, we can see where all this is coming from. War in Europe, geopolitical tensions all around the world, an economy still recovering from years of lockdowns, and now rising inflation.
One of the main metrics that economists use to measure inflation is the CPI. Of late, it had risen sharply all over the world, and is now starting to cool off in many economies, much to the delight of the ordinary ‘investor‘/speculator. But we need to remember that the CPI is a rate of increase. A dropping CPI reading does not mean that inflation is getting smaller, but that it is still rising relatively strong – just a bit less rapidly so.
The market vs. the economy
The stock market, however, is not ‘the economy’. It is rather a thermometer, a forward-looking composite alloy of what people expect for the economy down the line.
The market is and has been pricing in a global recession to kick at least during parts of 2023. Opinions of when exactly this will happen are divided, although technically slowing growth numbers have already been showing in various nations around the world.
Many times in history, the stock market had rallied strongly and “climbed a wall of worry” against overall negative sentiment and news. The bull market during the COVID-19 pandemic posted a ludicrous 78% rally off the March 2020 bottom through to November 2020 before any vaccines had been tested successfully. This should indelibly burn a recent example of the forward-looking nature of stocks into the memory of speculators.
However, no one can predict with accuracy what will happen, though many try. No one can say with certainty whether there will be a decade-long bear or flat market, when it will start, and when it will end. The market itself will tell.
However, I want to lay out that you need not fear a ‘lost decade’, unless you have all your capital tied up in ETFs, mututal funds, or the blue-chips of the day.
‘Lost decade’ is a misnomer
The stock market has been through lengthy periods of down-trending or flat sideways-trending prices over and over.
Some of the major times were stock indices of a western(ized) economy broke their legs after a drunken leap off the balcony occurred in 1929 to 1954, post the 1929 Wall Street crash and the Great Depression when the Dow Industrials Index took 25 years (!!) to recover to its old price levels; after the dot.com bubble, when the NASDAQ Composite took 15 years to regain its might; or from 1990 to about 2013, when the Japanese Nikkei spiraled downwards, and to date still hasn’t recovered to its old Highs.
A standout period where markets went flat sideways for a sustained amount of time was the period from 1964 to 1982, where the Dow Industrials Index traded in a tight range without going anywhere substantially for 18 years (!!). A true example of more than a ‘lost decade’.
When you look at a chart of such a period though, scrutiny will reveal that a market never goes really ‘flat’, straight sideways, or straight down throughout. Look at the chart of the Dow Industrials Index (DJI) below, depicting prices from 1964 to the 1980s. Though the market went seemingly sideways for 18 years (orange box), it had a multitude of smaller but still year-long up- and down-trends (green and red lines, respectively) in this period.
Each of these up- and downtrends have their leading stocks on the long and short side. Stocks that can be bought at the right time, pyramided into, and profited from. What is frustrating to a passive investor, is of no further consequence to the speculation endeavors of a stock picker who knows what he’s doing.
Stocks vs. the market
Any time period of prolonged sideways action in the market averages, and the smaller trends nested in them, harbors hundreds of stocks that make lengthy upside runs and outperform the indices. These include a good-sized amount of leading stocks that can be very attractive to a skilled stock speculator.
For the above-charted period including the late ’60s to the early ’80s, history shows that more than 44 individual stock leaders have staged extremely impressive runs in this era … a conservative estimate of mine, that is only looking at the very best merchandise of the time.
These stocks came from various industries, ranging from computer manufacturers to energy companies. Their gains ranged from 150% to higher than 1600%, achieved over a few months to a bit more than a year … in a time where the market averages fluctuated back and forth, and net really went nowhere.
Acting on and managing well only a single of such opportunities can return a fortune in returns, provided they can be spotted before. I’ve picked out two examples to make this point – Digital Equipment Corporation, and Wang Laboratories.
Example #1 – Digital Equipment Corp
1967 to 1968 was one of those multi-month uptrends nested in the ‘lost decades’ of the 1960s to ’80s, and Digital Equipment Corporation (DEC) was only one of the many stocks that went to outperform the market in this time to make good profits for the avid stock speculator.
DEC was an early producer of innovative mini-computers and the associated peripheral hardware, that found a large market in the public and private research sector. It was one of those rare companies that managed to establish its IPO in the late autumn of 1966, near the bottom of a cyclical bear market.
As luck would have it, the general market trend was then right in the process of turning up, and new leadership was emerging. Strong supportive volume within the DEC’s digestion (see chart below) was an institutional footprint and an early tell of an emerging leader.
The stock was buyable at a positive resolution and continuation of uptrend from a digestion period a few weeks after its IPO date, found support continuously at its 50day moving average, and proceeded to move from $12 (after splits, actually around $28 at the time) to over $50 in just over a year. That’s a >400% run, and from entry to breaking support aggressively could have given a profit of about 333% (~$40). As marked on the chart, the stock offered multiple add-on points, to increase one’s exposure and profits.
In the years after, DEC lost its competitive edge, and its stock ceased to be a leader up to its buyout by Compaq … for profitability, timing of entries and exits is everything.
Example #2 – Wang Laboratories
Another uptrend that turned out to be profitable for a stock picker while the markets continued going sideways in the long-term picture ranged from 1978 to ’81, where many stocks again went to out-sprint the market.
Wang Labs (WANG) was a rising star in the electronics industry, producing desktop calculators and word-processors. Their machines could be connected to other office equipment and even telephone lines – disruptive technology at that time. The company was trying to innovate at high pace, trying to compete with then-market leader IBM. Quite the entrepreneurial spirit, Wang Labs’ co-founder was quoted with “You have to risk failure to succeed”.
While the market headed south for the better part of one and a half years in 1976 to ’77, WANG kept resisting the downtrend, displaying subtle and not-so-subtle cues of large capital inflow. In fact, massive volume drove WANG stock up, while the general market kept tanking month for month. To retain control of the company with Class C stock, the Wang family issued public Class B shares, which were heavily accumulated by large traders and funds.
When finally the market turned in spring of 1978, WANG had formed a highly constructive 11 week digestion pattern displaying superb price-volume characteristics.
WANG went from (split-adjusted) $2.8 to $8, about 285% of upside in a window of 6 months, another prime opportunity for a vigilant speculator.
From 1977-’78, earnings and sales grew massively, as one would demand from the fundamentals of a market leader. There was at least one more add-on buy point when WANG found support at its moving average in summer of ’78, and the stock had a textbook climax run into autumn that gave holders clear signals to exit or at least scale out.
There’s always opportunity
Again, remember that even when seen conservatively, there were in excess of 40 stocks that gave such opportunities in the ‘flat markets’ of the ’70s and ’80s. Each single one could have given the shrewd operator skilled in money management and risk control sufficient profits to outperform the trend-less indices by very wide margins.
If – and that’s a big ‘if’ – we will really get a ‘lost decade’ and sideways indices for a couple of years, do not fret. Every sideways market consists of some smaller trends, and within each are found true gems for those daring to dig them out. Every secular bear market contains cyclical bull markets, with leaders sprinting ahead and making money for the people in the right place at the right time. Achieving this feat is not magic, but based in commitment and skill.
Don’t fear flat indices. Educate yourself on how to deal with such an environment, and how to thrive in it.
(n.b. reported price levels are down-adjusted to later splits)
