How Long Can Our Bear Market Last?

January 8, 2009 by  
Filed under Investing, Retirement Planning

Money Magazine published some interesting numerical data this month comparing the present state of affairs in our stock market with historical (and present data) pertaining to other market conditions.  The data is kind of scary for baby boomers like Mr. ToughMoneyLove.  Let’s take a quick look, then find something else to think about that might elevate our mood.

1.  The last sustained bull market in the U.S. ended eight years ago.  (Remember the good ‘ol days?)

2.  After the bear market in 1966, it was twelve years before the market (S&P 500) made a permanent recovery.  (Don’t things move a little faster now?  Please say that they do.)

3.  Our fierce economic competitor Japan has been in a bear market for nineteen years and still counting.  If we like their cars so much compared to nineteen years ago, why is their stock market still stuck in a coma?

The data that bothers me the most is number 3.  We know that the Japanese banks and economic planners blundered badly when things first went south, but nineteen years?  Are you kidding me? 

Let’s assume for a brief moment that we end up like Japan.  If we place the start of our bear market at post- 9/11 (ignoring the bubble that maxed out in October 2007 then quickly deflated), our markets will languish in the red or neutral zones until at least 2020.  I don’t know about you, but a scenario where our markets don’t really go anywhere for eleven more years has not been factored into my retirement planning.   From what I have been reading, that would be true for almost all baby boomers and their financial planners.

So what is Japan doing wrong that we should avoid so as to not follow its bear trail into a long, sad future?  Here is one interesting trend.  Japanese consumers have been known for their high savings rates as compared to Americans.  However, the Japanese savings rate peaked in 1981 at 18% but has steadily declined since then, reaching a record low of 2.2% for the most recent data released.  (Source:  Economic and Social Research Institute of Japan)  That is still higher than our 0.6% savings rate (from comparable 2007 data). 

The economic experts believe that the Japanese savings rate has been declining because its population has been aging.  This results in more people living off savings instead of adding to it.  This raises the question of whether there is any correlation between the Japanese bear market, the aging population, and the declining savings rate.  That question is important to us because with 72 million U.S. baby boomers (source: Population Reference Bureau) beginning to retire at an estimated rate of 10,000/day, our pathetically low U.S. savings rate (which actually started to inch up in 2008) will likely begin to decline again.  Like the Japanese oldsters, we boomers will be living off savings, including selling stocks and mutual funds that we haven’t dumped already.

In other words, if there is a correlation between aging populations, declining savings rates, and extended malaise in the stock market, we may be following Japan’s lead for a long, hard ride.

So what do we do?  I have heard and read quite a bit about the retirement investing theories of Zvi Bodie, a professor of management at Boston University.  In 2007, he published a book called “Worry Free Investing” in which he explains that investing in stocks – even for the long run – is risky. Bodie instead proposes an investment strategy that focuses on inflation-protected bonds, e.g., I-bonds and TIPS.  I haven’t read Bodie’s book yet but it has been on my “need to read” list.  I’m all in favor of worry reduction so based on what is going on now, I’ve moved his book near the top of my reading list. 

So how long do you think our bear market will last?  Have any of you studied Bodie’s investing theories?

Photo credit:  Ksenia Kalinina

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3 Responses to “How Long Can Our Bear Market Last?”
  1. vilkri says:

    There are major systematic differences between Japan and the US. For one, Japan is run by bureaucrats and not politicians. This makes public processes a lot slower. (Not that politicians have such a great track record, but at least you can get rid of them.) Japan is also much more an old-boys’ network than the US is. And lastly, the US is known for taking the bull by its horns. While the attitude of “shooting first and asking questions later” is hardly ever a good thing, I think this hands-on attitude has helped America in the way it does business. Japan is not at all like that. Don’t forget how quickly and easily the US resolved the S&L crisis which was similar to the real estate bubble in the 1980’s in Japan. The Japanese have not recovered yet while we are already facing the next crisis after another tremendous boom.

    One more point about a possible correlation between a bear market, savings rate and demographics. The US has an advantage here, too. It is a country of immigrants. (The US has done a great job ignoring its indigenous people. So, let’s keep doing it.) As long as there is a good flow of immigrants the demographics will be much more advantageous to the US. Immigrants tend to be young and hard-working no matter whether they are legal or illegal. Very few of the immigrants to the US come her to abuse the system as they do in Europe, for example, where there is a much deeper social security net.

    Bottom line: My vote goes to the US, if there is any country out there that can get organized well enough to get out of this mess.

  2. TStrump says:

    I’m reading a book called ‘The Next Great Bubble Boom’ by Harry S. Dent, Jr.
    It has some interesting predictions (largely based on demographics).
    In the book, he predicts that the markets will pick up by late 2009/early 2010, peak by mid-to late- 2010 and then crash sometime between 2010 and 2013; after that, we will face a 12-yr bear market.
    Very compelling reading.

  3. Curt says:

    Excellent article. I think you’re right, we are in for a long recession, perhaps 20 years and if the dollar collapses along the way – it will take out our legs and take America off the map.

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