had this sent to me today thought i'd share... BEAR MARKET ANATOMIES The timing, depth and duration of the recorded bear markets in Australian equities in the post WWII period. In most cases, there is no single trigger for either the beginning or end of a bear market. In short, often ‘**** just happens’. However, it is possible to talk about what kind of macroeconomic environment or geopolitical event influenced markets at or around the time of various turning points. May 1951 – Dec 1952 / Duration 19 months -33.5% The Korean War started in June 1950 and ended with a more or less permanent cease fire in July 1953. It certainly seemed longer – M.A.S.H. ran for 11 seasons. For Australia, the War coincided with a boom in Australia’s wool industry and a surge in inflation. Annual inflation peaked in Australia at 25% at the end of 1951. All this prompted the Commonwealth Bank (no, not a misprint) and the Government to tighten monetary policy which then was implemented by restricting the amount banks had available to lend by raising reserve requirements. High inflation and tight money clobbered share prices in Australia, and the economy was lousy in 1951/52 as a result. The bear market in Australia occurred without something similar happening in the US, where share prices kept running until the end of the War. Sep 60 – Dec 1960 / Duration 3 months -19.2% Tight money was again the culprit here with the sharemarket falling without a lead from the US. Inflationary pressures started to build and the authorities imposed a credit squeeze to rein in the economy. During this time the Menzies Government managed to get itself re-elected despite the fact that the economy felt bloody awful for a good many people. The election came down to one seat – Moreton in Queensland where Jim Killen (later Sir James) hung on by the skin of his teeth. Menzies sent him a one line telegram (“Killen you are magnificent”). July 1964 – Sep 1965 / Duration 14 months -17.7% Again, a home grown affair – no US lead. Can’t find anything to say about this one, unlike the next of our bear markets….! Jan 1970 – Nov 1971 / Duration 22 months -34.6% The Poseidon bubble of the late 1960s had its genesis in the nickel market. In the second half of the 1960s shortages of nickel were emerging. There was high demand spurred by the Vietnam War and a shortage of supply as the major Canadian producer, Inco, was embroiled in industrial action. This had seen the free price of nickel (as opposed to the controlled producer price) skyrocketto reach a peak around £7 000 per ton on the London market at the beginning of November 1969. Poseidon came to the public’s attention at just the right time. Poseidon NL (no liability) was a mining exploration company that made a major nickel discovery at Windarra in Western Australia in 1969. Poseidon had been languishing for many years before it acquired some exploration leases and hired a prospector in 1968. Poseidon’s shares started rising around September 25, 1969 when results from drilling on the Windarra site became known to some insiders. Shares had been trading around $0.80 in early September and rose to $1.85 on Friday September 26. On Monday September 29 the company made a preliminary announcement that drilling had found nickel and this pushed the share price from $1.85 to $5.60. On October 1, company directors made a more detailed announcement indicating that they had a major nickel find. The share price jumped from $6.60 to $12.30 that day and then kept going up. The discovery made the front page of the Australian Financial Review (AFR) on October 3 with the headline ‘Nickel boom turns radioactive’. From here on it captured the public’s imagination. Other mining shares started to rise as speculators took positions in nickel stocks, then companies with leases near Windarra, and miners in general. From October to December 1969 the ASX All Mining index rose by 44 per cent from 438 to 632. While the run-up in Poseidon’s share price was spectacular, it was at least based on a real discovery. The speculative excess in the market is much more obvious in the behaviour of other mining shares. There were a large number of listings as promoters tried to cash in on the aura surrounding mining stocks. The resources market, as measured by the ASX All Mining Index, peaked in January 1970 and Poseidon shares peaked in February. Thereafter, both fell quickly and substantially. There is no clear indication of what triggered the decline but the activities of the fringe companies no doubt helped to tarnish the stock market in many people’s minds. At its peak Poseidon had a market capitalisation of $700 million, which was about a third of the capitalisation of BHP (Australia’s largest company) at the time. That kind of value was not bad for a company that only had one mine! Jan-1973 – Oct 1974 / Duration 21 months -54.1% This bear market was associated with the first oil shock. The price of Saudi Arabian oil started 1973 at US$2.59 and started 1974 at US$11.65. The impact on inflation, economic growth, as well as confidence was staggering. In truth, inflation was already drifting higher prior to the oil shock. Later studies pointed to a dramatic drop in productivity as a contributing factor to both higher inflation and stagnant economic growth. The route causes of the oil shock were many and varied, and were building over a number of years. OPEC was formed in the early 1960s but really had no teeth until the early 1970s. The Yon Kippur war between Israel and its Arab neighbours was a factor, as was the fact that oil producing countries had become utterly sick of being done over by Western oil companies over many years! By the latter stages of 1974, oil prices had started to ease, as it became clear that supply had not in reality been restricted terribly much and that there was in fact a decent surplus of oil emerging. However, prices soon started to climb further. Domestically, the Whitlam Government was widely viewed as either inept or corrupt or a combination of both. To be fair, they were just as confused about what to do to combat the simultaneous occurrence of high inflation and stagnant growth as every other Government around the world. Nov 1980 – Jul 1982 / Duration 598 days -36.1% A number of factors were behind this bear market. Oil prices had risen substantially further, particularly in the aftermath of the Iranian revolution, which brought the current regime to power. In addition, the US Federal Reserve under Paul Volker had decided that fighting inflation and grinding inflation expectations out of the system was the way to restore sense to the management of the US economy. In the process, the US entered a deep recession which had obvious ramifications for Australia and indeed the world, and sharemarkets. Locally, the market had benefited from a commodity boom in the late 1970s which lasted into 1980. The price of gold soared to what were then record highs in early 1980, after the Soviet Union invaded Afghanistan in December 1979. 21 Sep 1987 – 11 Nov 1987 / Duration 51 days -49.7% The stock market crash of 1987 occurred on Oct 20 1987 in Australia and the 19th in the US. There has been a lot of work done as to why stocks chose that day particular to crash, but no conclusive reason emerges. In fact, markets had already begun to weaken in September 1987. During 1987, the Federal Reserve had progressively tightened monetary policy and bond yields had risen. During the boom, a number of very dodgy companies and company structures emerged, including names like Bond Corporation, Adelaide Steamship, Quintex, and Elders-IXL. A recovery of sorts began quite quickly, helped by a clear and unequivocal statement from the Greenspan-led Federal Reserve (he’d only just been made Chairman) that the Fed stood ready to provide enough liquidity to keep markets functioning. In addition, the Fed funds rate was lowered in the aftermath of the crash. Memories of the previous stock market crash in 1929 fuelled fears that weaker share prices would hit the economy hard. In the event, it didn’t, and interest rates were raised again soon after. Aug 1989 – Jan 1991 / Duration 505 days -26.6% Interest rates in Australia were raised aggressively during 1988 and 1989 with cash rates peaking at around 18.5% during late 1989. Fears that this would crunch the economy (correct) undermined shares. The ‘recession we had to have’ was the worst in decades, and resulted in a series of corporate failures, a commercial property collapse, the collapse of a number of unlisted property vehicles (sound familiar?) the collapse of the Pyramid Building Society, the State Bank of Victoria, the State Bank of South Australia, and a near death experience for Westpac. May 1992 – Nov 1992 / Duration 178 days -17.8% This bear market is probably best viewed as an extension of the recession we had to have downturn. The aftermath of the recession was still being felt in the form of corporate collapses etc. Interest rates had come down a very long way, inflation was way down, profits had started to recover, but the economy for very many people and businesses still felt, well, bloody awful. Feb 1994 to Feb 1995 / Duration 370 days -18.7% After taking the Fed funds rate down to 3% - a then multi-decade low – the Federal Reserve was confident that the US economy was on a sustainable growth path, and that it was time to take the stimulus back. It started raising rates with a 25 basis point move on Feb 4 1994, and thus set in train the great bond market crash of 1994. Locally, 10 year bonds started the year in the low-6s and peaked at 10.75%! Lousy bond market and continued Fed tightening as well as an eventual series of tightenings by the RBA hit sharemarkets here and abroad. By early 1995, markets started to expect (correctly) that the US economy would enjoy a soft landing and that rates could eventually fall (they did). Mar 2002 – Mar 2003 / Duration 371 days -19.1% Post tech-bubble US growth funk followed by September 11. Even though the US rebounded from the 2001 recession reasonably quickly, and the effects of the September 11 attacks on the economy were not as bad as feared, sharemarkets performed poorly. Reasons? More terrorist attacks, Afghanistan, the threat of another War in Iraq, the risk that the US economy was not growing fast enough to avoid deflation. In a classic case of sell-the-rumour-buy-the-fact, the market started to recovery solidly when the War in Iraq finally started.