By DAVID MOON, Moon Capital
January 7, 2001
Years ago, I had a mentor who, when contemplating whether or not we were at an economic inflection point, would pose the rhetorical question, “is we is, or is we ain’t?” As in, “is we is having a recession, or is we ain’t?” (He was a brilliant guy, but from Alabama.)
Given the recent performance of the stock market and the speculation about bear markets and recessions, I suppose it is finally my turn. Is we is, or is we ain’t?
The recession question is easy. We are not in a recession. A recession has a very explicit and technical definition, requiring two consecutive quarters of DP contraction. We have not had a single negative quarter of economic growth, so no recession. That does not mean one isn’t looming around the corner, but we are not currently in one.
Defining a bear market is tougher. The old standard definition of a bear market is a 20 percent decline in the general level of stock prices The S&P 500 declined 9.11 percent last year, but is 17 percent below its 2000 high. The Dow Jones Industrial Average is 9.31 percent below its high. The NASDAQ, however, declined almost 40 percent and is 55 percent below its high of last March. Based on these three averages, one might conclude that the bear overtook the bull in 2000.
Not so fast investment zookeeper.
Though every definition of broad market averages declined in 2000, not all investors suffered similar fates. The average stock in the S&P 500 actually increased 13 percent in 2000, even while the overall average declined. How can that be?
Large companies are more heavily weighted in that index, so a hefty decline in the larger stocks has a greater impact than an increase in the smaller companies. Wal-Mart, Home Depot and Intel all declined more than 20 percent. Microsoft, once the most heavily weighted stock in the S&P 500, declined 62 percent last year. The overall index never had a chance.
(Of course, the reverse was true in 1999, when the average stock in the S&P 500 declined, while the overall index increased. Like 1999, there was a huge divergence between the returns of large-growth companies and smaller, value-priced stocks in 2000. The reported index returns benefited in 1999; they suffered in 2000.)
In fact, most value-oriented funds had double-digit increases in 2000, following relative underperformance in 1999. Some value investors were up as much as 20 percent or more, in a year that many are classifying as a bear market.
So, is we is, or is we ain’t?
Actually, we already did. In 1998 and 1999, almost every sector of the U.S. stock market experienced sometimes significant declines in a series of rolling, sequential bear markets. First, it was all sorts of small-cap stocks. Then, medium-sized industrials. Financial companies. Large-cap value stocks. Until 2000, every sector except technology and large-cap growth stocks had experienced major declines. Ask not for whom the bell tolls; it tolls for them. Or, at least, it tolled for them in 2000.
The valuation difference between value stocks and growth stocks had never been wider than at the beginning of 2000. Last year corrected much of that imbalance, but not all. In the past, corrections of one type of imbalance typically resulted in imbalances in the other direction. What does all of this mean of 2001? It is impossible to predict short-term movements in stock prices. But if we are having a bear market, then we are in the third year of it, experiencing it a sector at a time – not the beginning of it.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).