Why It All Happened 16 Years Ago for the Better
Thursday, October 21st, 2004
By Michael Lombardi, MBA for Profit Confidential
Most stock market fanatics remember exactly what they were doing on October 19, 1987… this market fan is no exception.
Two days ago, we passed the 16th anniversary of the market crash of October 19, 1987. The event was one of the largest percentage-point drops in the value of the Dow Jones Industrial Average in history. The market continued to fall in the week following the `87 crash, but stocks started to gain ground again in November of that year and eventually continued on the upward path they had started earlier in the decade.
At the time of the `87 crash, some doomsayers were comparing it to the crash of 1929 and predicting a depression. Yes, there was a big slowdown in business in 1990 and 1991, which I believe was foreshadowed by the `87 market crash, but it was certainly not a depression… very much more a severe recession.
The good thing about the `87 crash was that the bear market came, did its thing, and we all went back to value investing.
Today, it’s a very different situation. If you had bought into the Dow Jones Industrial stocks in late 1999, they would be worth less today than they were five years ago. Maybe you were lucky enough not to be a buyer of big-cap stocks in late 1999, but millions of investors were not so lucky. Unwittingly, these investors were placing their retirement money in big-cap mutual funds, many of which have yet to recover.
Anyway you look at it there has been a bear market in big-cap stocks for five years now. Personally, I would have much preferred a repeat of the `87 crash compared to five years of pain. At least after the crash of 1987 investors could have realistically found bargains among the big-cap stocks that got hammered.
Today, after a five-year bear market, it’s still very difficult to find values among the big-cap stocks, especially with the Dow Jones Industrial Average trading at a price-earnings multiple of 17.2 and a dividend yield of 2.16%.
My simple questions: Why buy into the Dow Jones Industrial Average to get a cash return of 2.16% when a 10-year T-note pays 3.99%? Why invest $1 in the Dow Jones Industrial Average to get $00.058 in earnings when interest rates are rising?
I’ve always been a big believer in micro-cap, small-cap, and penny stocks because that’s where real money can be made. The Dow Jones Industrial Average is all about big-cap stocks, but to me the popular index is more about being an indicator of how the biggest companies in the world are doing. And how these big companies are faring is often an indicator of how the economy is performing or will perform.
Please don’t be fooled by what you may hear or read from market optimists because the numbers don’t lie. We’ve been in a bear market in big-cap stocks for five years now. This means something. In the same way we didn’t find out the crash of `87 was foreshadowing the severe recession of 1990 and 1991 until the recession hit, we won’t know exactly what the Dow Jones Industrial Average is trying to tell us in its pathetic performance over the past five years until it happens… but eventually we will know. My bet, for what it’s worth, is that the popular index is foreshadowing a big slowdown in the economy.
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Tags: bear market, big-cap stocks, penny stocks, stock market
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
