1) Stocks spend so much of their time going up that it’s often useful to “practice” bear markets. The regime is so different from the one that we most often experience that it requires some combination of patience, discipline, and intestinal fortitude.
2) We have found it useful to study the Nifty Fifty period and the 1973-1974 bear market, in particular, as it appears to have considerable overlap to the so-called FAANG stocks of today.
3) The Nifty Fifty were a group of premier growth stocks such as Xerox, IBM, Polaroid, McDonald’s, Disney, Pfizer, Merck, Procter & Gamble, Pepsi, and Coca-Cola that became institutional darlings in the early 1970s and sparked a radical shift away from value investing.
4) At their peak in 1972, the Nifty Fifty traded at 42 times earnings, more than twice the S&P 500’s lofty average of 19. They were considered “one-decision” stocks, to buy and hold for life, as quality franchises allowed them to earn high returns on capital well into the future.
5) While this speculation has since proven to be correct (the average annual earnings growth was 11% through 1996), the delusion was that it didn’t matter what you paid for them.
6) A buy-and-hold investor who purchased a portfolio of Nifty Fifty stocks at the peak would still have matched the S&P 500 return over the next 25 years, 13% annually, but first they would have had to withstand a grueling decline.
7) The Dow had a good year in 1972, up 15%, but the advance was narrowing. The Nifty Fifty stocks powered ahead while other smaller issues languished. Fortune proclaimed, “The flush of robust prosperity is suffusing the economy.”
8) On January 11, 1973, the Dow rose to an all-time high of 1067. Barron’s article titled “Not a Bear Among Them” captured the sentiment. L.O. Hooper of the brokerage W.E. Hutton & Co said, “The economy is becoming less and less vulnerable to big booms and big busts.”
9) The Dow’s initial move down from the January high was very sharp and within a month, it was off 100 points or almost 10%. On January 23, President Nixon announced the end of the Vietnam war.
10) The rise in inflation and interest rates started to hurt the economy and Nifty Fifty stocks. The Watergate scandal was also widening as top Nixon aides resigned at the end of April on charges of obstruction of justice.
11) The Dow’s fall continued until late August into bear market territory when it finally bottomed at 857. Over 300 public stock offerings were withdrawn as unsalable during this period. “The stream of equity capital to US industry has run dry,” Business Week concluded.
12) From this point, the Dow surged 15% to 987 by the end of October, amid the Yom Kippur War and Vice President Spiro Agnew’s forced resignation. Bulls were lulled into believing that a new leg up had begun.
13) “It’s time to turn bullish,” said Myron Simons of the brokerage Wooden & Co. The two-month rally left the Dow just 6% shy of its record high in January. But the market internals were not confirming the advance.
14) On October 19, Arab oil producing countries proclaimed an oil embargo to influence political events. Oil prices quadrupled over the next six months. Inflation was already spiraling out of control and the US economy entered a recession in November.
15) The Dow fell 20% in six weeks to 788 by December. For the full year, Treasury bills earned 8% compared to the Dow’s 15% loss. Valuations collapsed to a 20-year low.
16) The brokerage industry’s 1974 market outlook was filled with qualifications. Barron’s columnist Alan Abelson wrote, “Never have so many said so much to such little purpose.” No one had any confidence in what the new year will bring.
17) After jumping back above 900 briefly in March, the Dow started to weaken again as impeachment hearings against Nixon began. Inflation and interest rates crept higher, while business profits buckled under the weight of a recession.
18) In August, Nixon resigned. The Dow began another gut-wrenching decline. “It was like a mudslide,” said Ralph Wanger of the Acorn Fund. “Every day you came in, watched the market go down another percent, and went home.”
19) The Dow dropped from 797 to 584 over the next two months, for a loss of 27%. Investors finally capitulated in despair. “There’s really no place to hide,” said Bill Grimsley of Investment Company of America.
20) Articles such as “Dow below 400?” from Forbes and “Is there no bottom?” from Newsweek were typical of the period. Fortune ran a story titled “A Case for Gloom About Stocks,” which said the bear market might not yet be finished.
21) The Dow shot up 16% from the October low, but then retested it again in December to mark its final bottom. The bear market of 1973-74 was over, 21 months after it began. The 45% decline was the worst ever since the Great Depression.
22) “The Nifty Fifty were taken out and shot one by one,” wrote a Forbes columnist. From the highs, Coca-Cola fell 69%, Xerox 71%, McDonald’s 72%, Avon 86%, Disney 87% and Polaroid 91%. The Dow’s January 1973 high would not be surpassed for another nine years.
