A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market. Crashes are driven by panic as much as by underlying economic factors. They often follow speculative stock market bubbles.
Stock market crashes are social phenomena where external economic events combine with crowd behaviour and psychology in a positive feedback loop where selling by some market participants drives more market participants to sell. Generally speaking, crashes usually occur under the following conditions: a prolonged period of rising stock prices and excessive economic optimism, a market where P/E ratios exceed long-term averages, and extensive use of margin debt and leverage by market participants.
There is no numerically-specific definition of a crash but the term commonly applies to steep double-digit percentage losses in a stock market index over a period of several days. Crashes are often distinguished from bear markets by panic selling and abrupt, dramatic price declines. Bear markets are periods of declining stock market prices that are measured in months or years. While crashes are often associated with bear markets, they do not necessarily go hand in hand. The crash of 1987 for example did not lead to a bear market. Likewise, the Japanese Nikkei bear market of the 1990s occurred over several years without any notable c
Mathematical theory of stock market crashes
The mathematical characterisation of stock market movements has been a subject of intense interest. The conventional assumption that stock markets behave according to a random Gaussian or normal distribution is incorrect. Large movements in prices (i.e. crashes) are much more common than would be predicted in a normal distribution. Research at the Massachusetts Institute of Technology shows that there is evidence that the frequency of stock market crashes follow an inverse cubic power law.[2] This and other studies suggest that stock market crashes are a sign of self-organized criticality in financial markets. In 1963, Benoît Mandelbrot proposed that instead of following a strict random walk, stock price variations executed a Lévy flight.[3] A Lévy flight is a random walk which is occasionally disrupted by large movements. In 1995, Rosario Mantegna and Gene Stanley analyzed a million records of the S&P 500 market index, calculating the returns over a five year period.[4] Their conclusion was that stock market returns are more volatile than a Gaussian distribution but less volatile than a Lévy flight.
Researchers continue to study this theory, particularly using computer simulation of crowd behaviour, and the applicability of models to reproduce crash-like phenomena....
Thursday, September 27, 2007
Market Events
An exaggerated bull market fueled by overconfidence and/or speculation can lead to a stock market bubble. At the other extreme, an exaggerated bear market, that tends to be associated with falling investor confidence and panic selling, can lead to a stock market crash and a recession.
Causes
Both bull and bear markets may be fueled by sound economic considerations and/or by speculation and/or investors' cognitive biases and emotional biases.
Expectations play a large part in financial markets and in the changes from bull to bear environments. More precisely, attention should be paid to reactions to information, chiefly positive surprises and negative surprises. The tendency is for positive surprises to fuel a bull market (when the news continually tends to exceed investor's expectations) and negative surprises tend to feed a bear market (with expectations disappointed). Also, some behavioral finance studies (Richard Thaler) show the role of the underreaction-adjustment-overreaction process in the formation of market trends.
Technical analysis
Many investors and analysts use technical analysis to try to identify whether a market or security is in a bull or bear phase, and to generate trading strategies to exploit the trend. Technical analysts believe that financial markets are cyclical and move in and out of bull and bear market phases regularly.
Etymology
The precise origin of the phrases "bull market" and "bear market" is obscure. The Oxford English Dictionary cites an 1891 use of the term "bull market", while other sources put the first use of the term much earlier, in 1859.[8]
The most common etymology points to London bearskin "jobbers" (brokers),[citation needed] who would sell bearskins before the bears had actually been caught in contradiction of the proverb ne vendez pas la peau de l'ours avant de l’avoir tué ("don't sell the bearskin before you've killed the bear")—an admonition against over-optimism.[citation needed] By the time of the South Sea Bubble of 1721, the bear was also associated with short selling; jobbers would sell bearskins they did not own in anticipation of falling prices, which would enable them to buy them later for an additional profit.
Some analogies that have been drawn, but are likely false etymologies:
* It relates to the common use of these animals in blood sport, i.e bear-baiting and bull-baiting.
* It refers to the way that the animals attack: a bull attacks with its horns from bottom up; a bear attacks with its paw from above, downward.
* It relates to the speed of the animals: bulls usually charge at very high speed whereas bears normally are lazy and cautious movers.
* They were originally used in reference to two old merchant banking families, the Barings and the Bulstrodes.
* Bears hibernate, while Bulls do not.
* Bears keep their chin up, while Bulls keep their chin down.
* Bear neck points down while Bull's points upwards.
* The word "bull" plays off the market's return's being "full" whereas "bear" alludes to the market's returns being "bare".
Another plausible origin is from the word "bulla" which means bill, or contract. When a market is rising, holders of contracts for future delivery of a commodity see the value of their contract increase. In a falling market, the counterparties--the "bearers" of the commmodity to be delivered, win because they have locked in a price higher than the present for future delivery.
Causes
Both bull and bear markets may be fueled by sound economic considerations and/or by speculation and/or investors' cognitive biases and emotional biases.
Expectations play a large part in financial markets and in the changes from bull to bear environments. More precisely, attention should be paid to reactions to information, chiefly positive surprises and negative surprises. The tendency is for positive surprises to fuel a bull market (when the news continually tends to exceed investor's expectations) and negative surprises tend to feed a bear market (with expectations disappointed). Also, some behavioral finance studies (Richard Thaler) show the role of the underreaction-adjustment-overreaction process in the formation of market trends.
Technical analysis
Many investors and analysts use technical analysis to try to identify whether a market or security is in a bull or bear phase, and to generate trading strategies to exploit the trend. Technical analysts believe that financial markets are cyclical and move in and out of bull and bear market phases regularly.
Etymology
The precise origin of the phrases "bull market" and "bear market" is obscure. The Oxford English Dictionary cites an 1891 use of the term "bull market", while other sources put the first use of the term much earlier, in 1859.[8]
The most common etymology points to London bearskin "jobbers" (brokers),[citation needed] who would sell bearskins before the bears had actually been caught in contradiction of the proverb ne vendez pas la peau de l'ours avant de l’avoir tué ("don't sell the bearskin before you've killed the bear")—an admonition against over-optimism.[citation needed] By the time of the South Sea Bubble of 1721, the bear was also associated with short selling; jobbers would sell bearskins they did not own in anticipation of falling prices, which would enable them to buy them later for an additional profit.
Some analogies that have been drawn, but are likely false etymologies:
* It relates to the common use of these animals in blood sport, i.e bear-baiting and bull-baiting.
* It refers to the way that the animals attack: a bull attacks with its horns from bottom up; a bear attacks with its paw from above, downward.
* It relates to the speed of the animals: bulls usually charge at very high speed whereas bears normally are lazy and cautious movers.
* They were originally used in reference to two old merchant banking families, the Barings and the Bulstrodes.
* Bears hibernate, while Bulls do not.
* Bears keep their chin up, while Bulls keep their chin down.
* Bear neck points down while Bull's points upwards.
* The word "bull" plays off the market's return's being "full" whereas "bear" alludes to the market's returns being "bare".
Another plausible origin is from the word "bulla" which means bill, or contract. When a market is rising, holders of contracts for future delivery of a commodity see the value of their contract increase. In a falling market, the counterparties--the "bearers" of the commmodity to be delivered, win because they have locked in a price higher than the present for future delivery.
Value investing
Value investing is a style of investment strategy from the so-called "Graham & Dodd" School. Followers of this style, known as value investors, generally buy companies whose shares appear underpriced by some forms of fundamental analysis; these may include shares that are trading at, for example, high dividend yields or low price-to-earning or price-to-book ratios.
The main proponents of value investing, such as Benjamin Graham and Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value. The discount of the market price to the intrinsic value is what Benjamin Graham called the "margin of safety". The intrinsic value is the discounted value of all future distributions.
However, the future distributions and the appropriate discount rate can only be assumptions. Warren Buffett has taken the value investing concept even further as his thinking has evolved to where for the last 25 years or so his focus has been on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price, this concept is important as you are actually buying into a business.
History
Benjamin Graham
Value investing was established by Benjamin Graham and David Dodd, both professors at Columbia University and teachers of many famous investors. In Graham's book The Intelligent Investor, he advocated the important concept of margin of safety — first introduced in Security Analysis, a 1934 book he coauthored with David Dodd — which calls for a cautious approach to investing. In terms of picking stocks, he recommended defensive investment in stocks trading below their tangible book value as a safeguard to adverse future developments often encountered in the stock market.
Further evolution
However, the concept of value (as well as "book value") has evolved significantly since the 1970s. Book value is most useful in industries where most assets are tangible. Intangible assets such as patents, software, brands, or goodwill are difficult to quantify, and may not survive the break-up of a company. When an industry is going through fast technological advancements, the value of its assets is not easily estimated. Sometimes, the production power of an asset can be significantly reduced due to competitive disruptive innovation and therefore its value can suffer permanent impairment. One good example of decreasing asset value is a personal computer. An example of where book value does not mean much is the service and retail sectors. One modern model of calculating value is the discounted cash flow model (DCF). The value of an asset is the sum of its future cash flows, discounted back to the present.
Value Investing Performance
Performance, value strategies
Value investing has proven to be a successful investment strategy. There are several ways to evaluate its success. One way is to examine the performance of simple value strategies, such as buying low PE ratio stocks, low price-to-cash-flow ratio stocks, or low price-to-book ratio stocks. Numerous academics have published studies investigating the effects of buying value stocks. These studies have consistently found that value stocks outperform growth stocks and the market as a whole.
Performance, value investors
Another way to examine the performance of value investing strategies is to examine the investing performance of well-known value investors. Simply examining the performance of the best known value investors would not be instructive, because investors do not become well known unless they are successful. This introduces a selection bias. A better way to investigate the performance of a group of value investors was suggested by Warren Buffett, in his May 17, 1984 speech that was published as The Superinvestors of Graham-and-Doddsville. In this speech, Buffett examined the performance of those investors who worked at Graham-Newman Corporation and were thus most influenced by Benjamin Graham. Buffett's conclusion is identical to that of the academic research on simple value investing strategies--value investing is, on average, successful in the long run.
During about a 25-year period (1965-90), published research and articles in leading journals of the value ilk were few. Warren Buffett once commented, "You couldn't advance in a finance department in this country unless you thought that the world was flat."[5]
Well Known Value Investors
Benjamin Graham is regarded by many to be the father of value investing. Along with David Dodd, he wrote Security Analysis, first published in 1934. The most lasting contribution of this book to the field of security analysis was to emphasize the quantifiable aspects of security analysis (such as the evaluations of earnings and book value) while minimizing the importance of more qualitative factors such as the quality of a company's management. Graham later wrote The Intelligent Investor, a book that brought value investing to individual investors. Aside from Buffett, many of Graham's other students, such as William J. Ruane, Irving Kahn and Charles Brandes have gone on to become successful investors in their own right.
Graham's most famous student, however, was Warren Buffett, who ran successful investing partnerships before closing them in 1969 to focus on running Berkshire Hathaway. Charlie Munger joined Buffett at Berkshire Hathaway in the 1970s and has since worked as Vice Chairman of the company. Buffett has credited Munger with encouraging him to focus on long-term sustainable growth rather than on simply the valuation of current cash flows or assets.
Another famous value investor is John Templeton. He first achieved investing success by buying shares of a number of companies in the aftermath of the stock market crash of 1929.
Martin J. Whitman is another well-regarded value investor. His approach is called safe-and-cheap, which was hitherto referred to as financial-integrity approach. Martin Whitman focuses on acquiring common shares of companies with extremely strong financial position at a price reflecting meaningful discount to the estimated NAV of the company concerned. Martin Whitman believes it is ill-advised for investors to pay much attention to the trend of macro-factors (like employment, movement of interest rate, GDP, etc.) not so much because they are not important as because attempts to predict their movement are almost always futile. Martin Whitman's letters to shareholders of his Third Avenue Value Fund (TAVF) are considered valuable resources "for investors to pirate good ideas" by another famous investor Joel Greenblatt in his book on special-situation investment "You Can Be a Stock Market Genius" (ISBN 0-684-84007-3)(pp 247)
Joel Greenblatt achieved annual returns at the hedge fund Gotham Capital of over 50% per year for 10 years from 1985 to 1995 before closing the fund and returning his investors' money. He is known for investing in special situations such as spin-offs, mergers, and divestitures. Edward Lampert is the chief of ESL Investments. He is best known for buying large stakes in Sears and Kmart and then merging the two companies.
The main proponents of value investing, such as Benjamin Graham and Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value. The discount of the market price to the intrinsic value is what Benjamin Graham called the "margin of safety". The intrinsic value is the discounted value of all future distributions.
However, the future distributions and the appropriate discount rate can only be assumptions. Warren Buffett has taken the value investing concept even further as his thinking has evolved to where for the last 25 years or so his focus has been on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price, this concept is important as you are actually buying into a business.
History
Benjamin Graham
Value investing was established by Benjamin Graham and David Dodd, both professors at Columbia University and teachers of many famous investors. In Graham's book The Intelligent Investor, he advocated the important concept of margin of safety — first introduced in Security Analysis, a 1934 book he coauthored with David Dodd — which calls for a cautious approach to investing. In terms of picking stocks, he recommended defensive investment in stocks trading below their tangible book value as a safeguard to adverse future developments often encountered in the stock market.
Further evolution
However, the concept of value (as well as "book value") has evolved significantly since the 1970s. Book value is most useful in industries where most assets are tangible. Intangible assets such as patents, software, brands, or goodwill are difficult to quantify, and may not survive the break-up of a company. When an industry is going through fast technological advancements, the value of its assets is not easily estimated. Sometimes, the production power of an asset can be significantly reduced due to competitive disruptive innovation and therefore its value can suffer permanent impairment. One good example of decreasing asset value is a personal computer. An example of where book value does not mean much is the service and retail sectors. One modern model of calculating value is the discounted cash flow model (DCF). The value of an asset is the sum of its future cash flows, discounted back to the present.
Value Investing Performance
Performance, value strategies
Value investing has proven to be a successful investment strategy. There are several ways to evaluate its success. One way is to examine the performance of simple value strategies, such as buying low PE ratio stocks, low price-to-cash-flow ratio stocks, or low price-to-book ratio stocks. Numerous academics have published studies investigating the effects of buying value stocks. These studies have consistently found that value stocks outperform growth stocks and the market as a whole.
Performance, value investors
Another way to examine the performance of value investing strategies is to examine the investing performance of well-known value investors. Simply examining the performance of the best known value investors would not be instructive, because investors do not become well known unless they are successful. This introduces a selection bias. A better way to investigate the performance of a group of value investors was suggested by Warren Buffett, in his May 17, 1984 speech that was published as The Superinvestors of Graham-and-Doddsville. In this speech, Buffett examined the performance of those investors who worked at Graham-Newman Corporation and were thus most influenced by Benjamin Graham. Buffett's conclusion is identical to that of the academic research on simple value investing strategies--value investing is, on average, successful in the long run.
During about a 25-year period (1965-90), published research and articles in leading journals of the value ilk were few. Warren Buffett once commented, "You couldn't advance in a finance department in this country unless you thought that the world was flat."[5]
Well Known Value Investors
Benjamin Graham is regarded by many to be the father of value investing. Along with David Dodd, he wrote Security Analysis, first published in 1934. The most lasting contribution of this book to the field of security analysis was to emphasize the quantifiable aspects of security analysis (such as the evaluations of earnings and book value) while minimizing the importance of more qualitative factors such as the quality of a company's management. Graham later wrote The Intelligent Investor, a book that brought value investing to individual investors. Aside from Buffett, many of Graham's other students, such as William J. Ruane, Irving Kahn and Charles Brandes have gone on to become successful investors in their own right.
Graham's most famous student, however, was Warren Buffett, who ran successful investing partnerships before closing them in 1969 to focus on running Berkshire Hathaway. Charlie Munger joined Buffett at Berkshire Hathaway in the 1970s and has since worked as Vice Chairman of the company. Buffett has credited Munger with encouraging him to focus on long-term sustainable growth rather than on simply the valuation of current cash flows or assets.
Another famous value investor is John Templeton. He first achieved investing success by buying shares of a number of companies in the aftermath of the stock market crash of 1929.
Martin J. Whitman is another well-regarded value investor. His approach is called safe-and-cheap, which was hitherto referred to as financial-integrity approach. Martin Whitman focuses on acquiring common shares of companies with extremely strong financial position at a price reflecting meaningful discount to the estimated NAV of the company concerned. Martin Whitman believes it is ill-advised for investors to pay much attention to the trend of macro-factors (like employment, movement of interest rate, GDP, etc.) not so much because they are not important as because attempts to predict their movement are almost always futile. Martin Whitman's letters to shareholders of his Third Avenue Value Fund (TAVF) are considered valuable resources "for investors to pirate good ideas" by another famous investor Joel Greenblatt in his book on special-situation investment "You Can Be a Stock Market Genius" (ISBN 0-684-84007-3)(pp 247)
Joel Greenblatt achieved annual returns at the hedge fund Gotham Capital of over 50% per year for 10 years from 1985 to 1995 before closing the fund and returning his investors' money. He is known for investing in special situations such as spin-offs, mergers, and divestitures. Edward Lampert is the chief of ESL Investments. He is best known for buying large stakes in Sears and Kmart and then merging the two companies.
Market trends
In investing, financial markets are commonly believed to have market trends[1] that can be classified as primary trends, secondary trends (short-term), and secular trends (long-term). This belief is generally consistent with the practice of technical analysis and broadly inconsistent with the standard academic view of financial markets, the efficient market hypothesis.
That market prices do move in trends is one of the major assumptions of technical analysis, and the description of market trends is common to Wall Street.
Market trends are described as periods when bulls (buyers) consistently outnumber bears (sellers), or vice versa. A bull or bear market describes the trend and sentiment driving it, but can also refer to specific securities and sectors ("bullish on IBM", "bullish on technology stocks," or "bearish on gold", etc.).
Primary market trends
Bull market
The Charging Bull in Bowling Green, New York is a symbol of the bull market.
The Charging Bull in Bowling Green, New York is a symbol of the bull market.
A bull market tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of further capital gains. The longest and most famous bull market was in the 1990s when the U.S. and many other global financial markets grew at their fastest pace ever.
In describing financial market behavior, the largest group of market participants is often referred to, metaphorically, as a herd. This is especially relevant to participants in bull markets since bulls are herding animals. A bull market is also described as a bull run. Dow Theory attempts to describe the character of these market movements.
The United States has been described as being in a long-term bull market since about 1983, with brief upsets including the Panic of 1987 and the NASDAQ Crash in 2000.
Bear market
A bear market is described as being accompanied by widespread pessimism. Investors anticipating further losses are motivated to sell, with negative sentiment feeding on itself in a vicious circle. The most famous bear market in history was 1930 to 1932, marking the start of the Great Depression.[5] A milder, low-level long-term bear market occurred from about 1967 to 1983, encompassing the stagflation economy, energy crises in the 1970s, and high unemployment in the early 1980s.
Prices fluctuate constantly on the open market; a bear market is not a simple decline, but a substantial drop in the prices of a range of issues over a defined period of time. By one common definition, a bear market is marked by a price decline of 20% or more in a key stock market index from a recent peak over a 12-month period. However, no consensual definition of a bear market exists to clearly differentiate a primary market trend from a secondary market trend.
Investors frequently confuse bear markets with corrections. Corrections are much shorter lived, whereas bear markets occur over a longer period with typically a greater magnitude of loss from top to bottom.
Secondary market trends
A secondary trend is a temporary change in price within a primary trend. These usually last a few weeks to a few months. A temporary decrease during a bull market is called a correction; a temporary increase during a bear market is called a bull market rally.
Whether a change is a correction or rally can be determined only with hindsight. When trends begin to appear, market analysts debate whether it is a correction/rally or a new bull/bear market, but it is difficult to tell. A correction sometimes foreshadows a bear market.
Correction
A market correction is sometimes defined as a drop of 10% to 20% (25% on intraday trading) over a short period of time. It differs from a bear market mostly in that it has a smaller magnitude and duration. Because of depressed prices and valuation, market corrections can be a good opportunity for value-strategy investors. If one buys stocks when everyone else is selling, the prices fall and therefore the P/E ratio goes down. Also, one is able to purchase undervalued stocks with a highly probable upside potential.
Bear market rally
A bear market rally is sometimes defined as an increase of 10% to 20%.
Notable bear market rallies occurred in the Dow Jones index after the 1929 stock market crash leading down to the market bottom in 1932, and throughout the late 1960s and early 1970s. The Japanese Nikkei stock average has been typified by a number of bear market rallies since the late 1980s while experiencing an overall downward trend.
Secular market trends
A secular market trend is a long-term trend that usually lasts 5 to 25 years, and consists of sequential primary trends. In a secular bull market the bear markets are smaller than the bull markets. Typically, each bear market does not wipe out the gains of the previous bull market, and the next bull market makes up the losses of the bear market. In a secular bear market, the bull markets are smaller than the bear markets and do not wipe out the losses of the previous bear market.
An example of a secular bear market was seen in gold over the period between January 1980 to June 1999, over which the nominal gold price fell from a high of $850/oz to a low of $253/oz,[6] which formed part of the Great Commodities Depression. The S&P 500 experienced a secular bull market over a similar time period.
An example of a secular bull market would be the US Stock market between August 1982 and June 2007. The DJIA, S&P500 and Wilshire 5000 indexes all made new record highs in 2007 with only a single cyclical bear market low in October 2002 after the cyclical bull market high made in March 2000.
These secular bull and bear market trends are also termed "super cycles". "Grand supercycles" of 50 to 300 years have also been proposed by Nikolai Kondratiev and Ralph Nelson Elliott.
That market prices do move in trends is one of the major assumptions of technical analysis, and the description of market trends is common to Wall Street.
Market trends are described as periods when bulls (buyers) consistently outnumber bears (sellers), or vice versa. A bull or bear market describes the trend and sentiment driving it, but can also refer to specific securities and sectors ("bullish on IBM", "bullish on technology stocks," or "bearish on gold", etc.).
Primary market trends
Bull market
The Charging Bull in Bowling Green, New York is a symbol of the bull market.
The Charging Bull in Bowling Green, New York is a symbol of the bull market.
A bull market tends to be associated with increasing investor confidence, motivating investors to buy in anticipation of further capital gains. The longest and most famous bull market was in the 1990s when the U.S. and many other global financial markets grew at their fastest pace ever.
In describing financial market behavior, the largest group of market participants is often referred to, metaphorically, as a herd. This is especially relevant to participants in bull markets since bulls are herding animals. A bull market is also described as a bull run. Dow Theory attempts to describe the character of these market movements.
The United States has been described as being in a long-term bull market since about 1983, with brief upsets including the Panic of 1987 and the NASDAQ Crash in 2000.
Bear market
A bear market is described as being accompanied by widespread pessimism. Investors anticipating further losses are motivated to sell, with negative sentiment feeding on itself in a vicious circle. The most famous bear market in history was 1930 to 1932, marking the start of the Great Depression.[5] A milder, low-level long-term bear market occurred from about 1967 to 1983, encompassing the stagflation economy, energy crises in the 1970s, and high unemployment in the early 1980s.
Prices fluctuate constantly on the open market; a bear market is not a simple decline, but a substantial drop in the prices of a range of issues over a defined period of time. By one common definition, a bear market is marked by a price decline of 20% or more in a key stock market index from a recent peak over a 12-month period. However, no consensual definition of a bear market exists to clearly differentiate a primary market trend from a secondary market trend.
Investors frequently confuse bear markets with corrections. Corrections are much shorter lived, whereas bear markets occur over a longer period with typically a greater magnitude of loss from top to bottom.
Secondary market trends
A secondary trend is a temporary change in price within a primary trend. These usually last a few weeks to a few months. A temporary decrease during a bull market is called a correction; a temporary increase during a bear market is called a bull market rally.
Whether a change is a correction or rally can be determined only with hindsight. When trends begin to appear, market analysts debate whether it is a correction/rally or a new bull/bear market, but it is difficult to tell. A correction sometimes foreshadows a bear market.
Correction
A market correction is sometimes defined as a drop of 10% to 20% (25% on intraday trading) over a short period of time. It differs from a bear market mostly in that it has a smaller magnitude and duration. Because of depressed prices and valuation, market corrections can be a good opportunity for value-strategy investors. If one buys stocks when everyone else is selling, the prices fall and therefore the P/E ratio goes down. Also, one is able to purchase undervalued stocks with a highly probable upside potential.
Bear market rally
A bear market rally is sometimes defined as an increase of 10% to 20%.
Notable bear market rallies occurred in the Dow Jones index after the 1929 stock market crash leading down to the market bottom in 1932, and throughout the late 1960s and early 1970s. The Japanese Nikkei stock average has been typified by a number of bear market rallies since the late 1980s while experiencing an overall downward trend.
Secular market trends
A secular market trend is a long-term trend that usually lasts 5 to 25 years, and consists of sequential primary trends. In a secular bull market the bear markets are smaller than the bull markets. Typically, each bear market does not wipe out the gains of the previous bull market, and the next bull market makes up the losses of the bear market. In a secular bear market, the bull markets are smaller than the bear markets and do not wipe out the losses of the previous bear market.
An example of a secular bear market was seen in gold over the period between January 1980 to June 1999, over which the nominal gold price fell from a high of $850/oz to a low of $253/oz,[6] which formed part of the Great Commodities Depression. The S&P 500 experienced a secular bull market over a similar time period.
An example of a secular bull market would be the US Stock market between August 1982 and June 2007. The DJIA, S&P500 and Wilshire 5000 indexes all made new record highs in 2007 with only a single cyclical bear market low in October 2002 after the cyclical bull market high made in March 2000.
These secular bull and bear market trends are also termed "super cycles". "Grand supercycles" of 50 to 300 years have also been proposed by Nikolai Kondratiev and Ralph Nelson Elliott.
Investment specific technological progress
nvestment-specific technological progress refers to progress that requires investment in new equipment and structures embodying the latest technology in order to realize its benefits.
Introduction
To model how something is produced, think of a box that in one end takes in inputs such as labor (employees) and capital (equipment, buildings, etc.) and in another end spits out the final good (see Figure 1). With this picture in mind now one can ask, how does technological progress affect production? One way of thinking is that technological progress affects specific inputs (arrows going in) such as equipment and buildings. To realize the benefits of such technological change for production these inputs must be purchased. So for example, the advent of the microchip (an important technological improvement in computers) will affect the production of Ford cars only if Ford Motor Co.'s assembly plants (the red box) invest in computers with microchips (instead of computers with punch cards) and use them (they are one of the arrows going in the box) in the production of Mustangs (the arrow coming out). As the name suggests, this is investment-specific technological progress---it requires investing in new machines or buildings which contain or embody the latest technology. Notice that the term investment can be very general: not only must a firm buy the new technology to reap its benefits, but it also must invest in training its workers and managers to be able to use this new technology (Greenwood & Jovanovic 2001) .
Importance
Identifying investment-specific technological progress is important, because knowing what type of technological progress is operating in an economy will determine how someone (should) want his or her tax dollars to be spent and how he or she may want to invest his or her savings (Gort et al 1999). If "investment-specific" technological change is the main source of progress, then one would want his or her dollars spent on helping firms buy new equipment and renovate their plants, because these investments will improve production and hence what you consume. Furthermore, one may want to help pay for current employee training in using new technologies (to keep them up to date) or subsidize the education of new employees (who will enter the job market knowing how to use the new technology). So, the type of technological progress will also matter for unemployment and education issues. Finally, if technological progress is "investment-specific" you may want to direct your money towards the research and development (R & D) of new technologies (like quantum computers or alternative energy sources) (Krusell 1998).
More generally, why is any type of technological progress important? Technological change has made our lives easier. Because of technological progress, people can work less, make more money and enjoy more leisure time (Greenwood & Vandenbroucke 2006). Women have been able to break away from the traditional "housewife" role, join the labor-force in greater numbers (Greenwood et al 2005) and become less economically dependent on men (Greenwood & Guner 2004). Finally, technological progress has been shown to affect the fall in child labor starting around 1900 (Greenwood & Seshadri 2005). Figure 2 illustrates this last point: as of 1900 child labor's share of the paid labor force began to fall.
A Simple Example: the microwave
An example of investment specific technological progress is the microwave oven. The idea of the microwave came to be by accident: in 1946 an engineer noticed that a candy bar in his pocket had melted while working on something completely unrelated to cooking (Gallawa 2005). The development of this good, from melting the candy bar to the home appliance we know today, took time and the investment of resources to make a microwave small and cheap. The first microwave oven cost between $2000 and $3000 dollars and was housed in refrigerator-sized cabinets (Gallawa 2005)! Today, almost any college student can enjoy a 3-minute microwaveable meal in the smallest dorm room. But a microwave's uses do not stop at the dorm room. Many industries have found microwave heating advantageous: it has been used to dry cork, ceramics, paper, leather, and so on (Gallawa 2005). However, for either college students or firms to reap the benefits of quick warming, they must first "invest" in a microwave (that "embodies" the technological advance). To realize the benefits of investment-specific technological progress you must first invest in a technology that embodies it.
How do you measure investment-specific technological progress?
While measuring technological progress is not easy, economists have found indirect ways of estimating it. If "'investment-specific'" technological progress makes producing goods easier, then we should expect the price of these goods (relative to the price of other goods) to decrease. In particular, "investment-specific" technological change has affected the prices of two inputs into the production process: equipment and structures. We think of equipment as machines (like computers) and structures as buildings. If there is technological progress in the production (or creation) of these goods, then we should expect the price of them to fall or the value of them to rise relative to older versions of the same good.
Conclusion
In the second section it was mentioned that "investment-specific" technological change is important since it will affect production (both in quality and size). An important question then is, just how much "bang for your buck" do you get with "investment-specific" technological change? The answer is quite astounding; economists have found that 37% of growth in US output (production) is due to technological progress in equipment and 15% is due to technological progress in structures (Gort et al 1999) (Greenwood et al 1997). All in all, more than half (37% + 15% = 52%) of the growth of the US economy is due to "investment-specific" technological change (Gort et al 1999) (Greenwood et al 1997).
Introduction
To model how something is produced, think of a box that in one end takes in inputs such as labor (employees) and capital (equipment, buildings, etc.) and in another end spits out the final good (see Figure 1). With this picture in mind now one can ask, how does technological progress affect production? One way of thinking is that technological progress affects specific inputs (arrows going in) such as equipment and buildings. To realize the benefits of such technological change for production these inputs must be purchased. So for example, the advent of the microchip (an important technological improvement in computers) will affect the production of Ford cars only if Ford Motor Co.'s assembly plants (the red box) invest in computers with microchips (instead of computers with punch cards) and use them (they are one of the arrows going in the box) in the production of Mustangs (the arrow coming out). As the name suggests, this is investment-specific technological progress---it requires investing in new machines or buildings which contain or embody the latest technology. Notice that the term investment can be very general: not only must a firm buy the new technology to reap its benefits, but it also must invest in training its workers and managers to be able to use this new technology (Greenwood & Jovanovic 2001) .
Importance
Identifying investment-specific technological progress is important, because knowing what type of technological progress is operating in an economy will determine how someone (should) want his or her tax dollars to be spent and how he or she may want to invest his or her savings (Gort et al 1999). If "investment-specific" technological change is the main source of progress, then one would want his or her dollars spent on helping firms buy new equipment and renovate their plants, because these investments will improve production and hence what you consume. Furthermore, one may want to help pay for current employee training in using new technologies (to keep them up to date) or subsidize the education of new employees (who will enter the job market knowing how to use the new technology). So, the type of technological progress will also matter for unemployment and education issues. Finally, if technological progress is "investment-specific" you may want to direct your money towards the research and development (R & D) of new technologies (like quantum computers or alternative energy sources) (Krusell 1998).
More generally, why is any type of technological progress important? Technological change has made our lives easier. Because of technological progress, people can work less, make more money and enjoy more leisure time (Greenwood & Vandenbroucke 2006). Women have been able to break away from the traditional "housewife" role, join the labor-force in greater numbers (Greenwood et al 2005) and become less economically dependent on men (Greenwood & Guner 2004). Finally, technological progress has been shown to affect the fall in child labor starting around 1900 (Greenwood & Seshadri 2005). Figure 2 illustrates this last point: as of 1900 child labor's share of the paid labor force began to fall.
A Simple Example: the microwave
An example of investment specific technological progress is the microwave oven. The idea of the microwave came to be by accident: in 1946 an engineer noticed that a candy bar in his pocket had melted while working on something completely unrelated to cooking (Gallawa 2005). The development of this good, from melting the candy bar to the home appliance we know today, took time and the investment of resources to make a microwave small and cheap. The first microwave oven cost between $2000 and $3000 dollars and was housed in refrigerator-sized cabinets (Gallawa 2005)! Today, almost any college student can enjoy a 3-minute microwaveable meal in the smallest dorm room. But a microwave's uses do not stop at the dorm room. Many industries have found microwave heating advantageous: it has been used to dry cork, ceramics, paper, leather, and so on (Gallawa 2005). However, for either college students or firms to reap the benefits of quick warming, they must first "invest" in a microwave (that "embodies" the technological advance). To realize the benefits of investment-specific technological progress you must first invest in a technology that embodies it.
How do you measure investment-specific technological progress?
While measuring technological progress is not easy, economists have found indirect ways of estimating it. If "'investment-specific'" technological progress makes producing goods easier, then we should expect the price of these goods (relative to the price of other goods) to decrease. In particular, "investment-specific" technological change has affected the prices of two inputs into the production process: equipment and structures. We think of equipment as machines (like computers) and structures as buildings. If there is technological progress in the production (or creation) of these goods, then we should expect the price of them to fall or the value of them to rise relative to older versions of the same good.
Conclusion
In the second section it was mentioned that "investment-specific" technological change is important since it will affect production (both in quality and size). An important question then is, just how much "bang for your buck" do you get with "investment-specific" technological change? The answer is quite astounding; economists have found that 37% of growth in US output (production) is due to technological progress in equipment and 15% is due to technological progress in structures (Gort et al 1999) (Greenwood et al 1997). All in all, more than half (37% + 15% = 52%) of the growth of the US economy is due to "investment-specific" technological change (Gort et al 1999) (Greenwood et al 1997).
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