The Bear Market: A Little Perspective

The month of March marks the three-year anniversary of the bursting of the stock market bubble (NASDAQ was 5048.62 then; it's about 1315 now). Wall Street historians are fond of saying that bubbles cast long shadows and, as we enter the fourth year of a bear market, the end is still not in sight. The great equity culture of the '90s, with a new investor class taking ownership stakes to finance innovation, entrepreneurship, and fast economic growth, is in shambles. In its place is a volatile market dominated by professional traders. Individuals are outta there -- and even loath to open their unremittingly grim mutual fund and 401(k) statements.

No one knows how long this is going to continue. The last major bear market went from 1966 to 1982. The one before that went from 1929 to the beginning of World War II. We do know that there is plenty of overcapacity remaining in the telecom, airline, automotive, and financial services sectors; that share valuations are not cheap; that new accounting and corporate government rules are just beginning to be implemented; and that jitters over war and terrorism are making everyone risk-averse.

What we often overlook is that the productivity revolution, which began in the '90s, continues, helping companies to rebuild their profit margins. We also forget that a second, younger demographic bulge, almost as big as the baby boom, is moving through the economy. These 20- and 30-somethings appear to be, if anything, even more equity-oriented than their parents and may be ready to take over from their burned-out older investors. Finally, we forget that many information technologies have short three-year life cycles. The last time Corporate America binged on technology was in 1999 in the runup to Y2K. Tech is getting creaky and needs to be replaced.

Given the economic and military uncertainties the U.S. faces, only a fool would be optimistic at this moment. But it would also be cock-eyed to believe that this pessimism will persist forever.

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