Since 1956 there have been 10 bear market cycles when the market declined 20% or more. The first one led to the ensuing 1957 bull market that would give birth to the modern investment business. It also pioneered a new sector, then called electronics, now known as technology. In 1958, Jerry Tsai was chosen to manage the new Fidelity Capital Fund. Roland Grimm – the Fidelity Trend Fund manager – would tell me years later, “We had just 25 million under management and lost money every day we were open.” But that new bull market changed the investment business forever.

When one is in a bear market, it’s hard to imagine that it will set up the elongation of a future bull market. Bull markets last an average of 6.6 years and cumulatively return +339%; bear markets last 1.3 years with an average cumulative loss of -38%.  Fed funds in 1958 were 1% on their way to 20% in 1980. This gave rise to a wide dispersion in the stock market and “created” major success for many active portfolio managers. As interest rates rose, it ended the high stock market correlation which had been in place the previous 26 years. Then stocks were bought for dividends. Instead, stocks started to become owned for growth. Tsai had bought stocks such as Polaroid and Xerox. It was the beginning of the “Go-Go” years and evolved into the Nifty-Fifty era, a precursor of today’s one decision indexation.  

John Bogle’s pursuit of this new growth stock concept caused his being fired as the C.E.O. of Wellington Management. He had purchased a new “hot” growth mutual fund named the Ivy Fund. The fund was owned by four principals who were given the management of Wellington in 1968. But then came the bear market of 1973-74. It was caused by inflation and interest rates moving up. Sound familiar? That experience would be the worst bear market cycle since the great depression. Bogle was fired for the purchase. Wellington had a noncompete clause in his employment contract. Later, he would be given “Guru” status for his “vision” in creating noncompetitive passive management.

Excess is a turning point in markets. A big impact in market cycles occurs when there is a large concept driving the previous bull market. Such was the impact of the Nifty-Fifty era going into 1973-1974. Fifty stocks were then leading the market higher, while breadth had been fading for years. Today we have Blitzscalers (Uber et al.) and the FANG stocks, leading more than 50% of the market with indexation. As interest rates move higher, and indexation unwinds, it will impact the current bear market as it did in the bull phase. Given FANGs more than 20+ percentage of the S&P 500 at the top, it will be severe.

A 0% interest rate policy for the past 12 years precluded any active management success. Fear is always the determinant in creating the 60-90% correlation (stocks moving together as an asset class).  This has created a particularly volatile market the past few months. According to the Financial Times, the S&P 500 has routinely moved 2-3% for 44 trading days the first five months of this year. Are we then expected to believe the acolytes of passivity that a 1% cost in a year is the determining factor?

Fear is what creates the correlation of stocks. It’s an emotion we all share at the same time. Someone crying “fire” in a theater is the classic example. The debt and Covid-19 crises are representative examples. But we do not all share optimism at the same time, any more than we all go into a “theater” at the same time. A security analyst I’ve never met, Michael A. Gayed, made one of the most cogent comments about these investment cycles. “There are no gurus, only cycles.”