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March 2, 2012, 12:01 a.m. EST
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By Mark Hulbert, MarketWatch
CHAPEL HILL, N.C. (MarketWatch) "” Nasdaq 3,000? I don't see why it's such a big deal.
After all, when the Nasdaq Composite Index /quotes/zigman/123127 COMP -0.43% does finally eclipse this level (it has come close now for a number of trading sessions, but so far in vain), it will still be more than 40% below its all-time high set in March 2000. That was 12 years ago. And the damage to this index in inflation-adjusted terms has been far worse "” a 55% loss.
Celebrating that has to be a great example of gallows humor. It reminds me of the classic scene at the end of the Monty Python movie, "Life of Brian," in which the criminals, on the brink of being crucified, happily sing "Always Look on the Bright Side of Life."
In fact, no other bear market in U.S. stock market history has been as awful as the Nasdaq's since 2000.
Weren't the 1930s even worse, I can imagine many of you responding? Didn't it take 25 years for the Dow Jones Industrial Average /quotes/zigman/627449 DJIA -0.02% to surpass its 1929 pre-crash level?
Stocks rise after firm readings from the labor market and retail sales, but give up gains late in the session after a report of a pipeline explosion in Saudi Arabia, subsequently denied. Photo: AP
Well, yes. But the Dow paints a distorted picture. The reality was far less bad.
In fact, according to Ibbotson Associates, a division of Morningstar, the price-adjusted total return index of the U.S. stock market was in late 1936 just as high as it was at its pre-crash peak in 1929. That was less than eight years later.
Bad, yes. But not nearly as bad as what the Nasdaq has experienced.
What about the famous (infamous?) period between January 1966 and October 1982? Wasn't the Dow at the end of this 16-year period at the same level (1,000) that it was at the beginning "” and far lower in inflation-adjusted terms?
Yes, but once again the Dow paints a distorted picture. According to Ibbotson, the inflation-adjusted total return index of the U.S. market was higher at the end of 1972 than it was in January 1966. And by mid-1983 that index was higher still "” 10 ½ years later.
Again not nearly as bad as the Nasdaq's recent bear market.
If not U.S. bear markets, how about the Japanese bear market over the last couple decades? Hasn't it been worse?
It certainly looks that way on the surface, since after almost reaching the 40,000 level in 1989, the Nikkei Stock Average /quotes/zigman/5986735 JP:NIK +0.72% has entered a prolonged and devastating bear market in which this benchmark has never come even close to recovering. Despite the passage of more than two decades, it languishes today at only a quarter its 1989 peak.
Yet again, the full picture is not that bad. When I used the Japanese wholesale price index to adjust the MSCI Japan Total-Market Total-Return dollar-denominated index, I found that the Japanese stock market was higher in March 2000 than it was at its 1989 peak.
The takeaway from all these examples: Broadly diversified indexes recover far more quickly from bear markets than do narrowly-defined subsets "” whether that subset is the Dow, with just 30 stocks, or the Nasdaq Composite, a value-weighted benchmark that is dominated by a relatively small number of large-cap companies.
The lesson to learn, therefore, as we approach Nasdaq 3,000: Broad diversification is a Good Thing. Anyone who put all their money into the Nasdaq Composite in March 2000 was putting far too many eggs in the baskets of a few Internet companies like Cisco /quotes/zigman/20039/quotes/nls/csco CSCO -0.60% "” which at the time played as big a role in the index as Apple /quotes/zigman/68270/quotes/nls/aapl AAPL +0.13% does today.
We should have known better, of course. But if the Nasdaq's today being so far below its March 2000 peak will lead us to finally take this lesson to heart, then perhaps we can say that the last decade has not been entirely a lost one.
Click here to learn more about the Hulbert Financial Digest.
Mark Hulbert is the founder of Hulbert Financial Digest in Annandale, Va. He has been tracking the advice of more than 160 financial newsletters since 1980.
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Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD... Expand
Mark Hulbert is editor of the Hulbert Financial Digest, which since 1980 has been tracking the performance of hundreds of investment advisors. The HFD became a service of MarketWatch in April 2002. In addition to being a Senior Columnist for MarketWatch, Hulbert writes a monthly column for Barron's.com and a column on investment strategies for the Journal of the American Association of Individual Investors. A frequent guest on television and radio shows, you may have seen Hulbert on CNBC, Wall Street Week, or ABC's World News This Morning. Most recently, Dow Jones and MarketWatch launched a new weekly newsletter based on Hulbert's research, entitled Hulbert on Markets: What's Working Now. Collapse
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