Information Bear Markets
History has much to tell us about bear markets. However, there have been dramatic changes in the stock markets and investors between the 1990 bear market and the current one. These changes might lay the groundwork for a new type of bear market I call the "information bear market." Admittedly, there is no scientific basis for this--and it hasn't happened yet. However, if you watch some of the cable financial news channels or visit many Web sites, you may notice how frantic they can make the market sound. This makes great drama but distorts reality by focusing on minute-to-minute market activity.
However, I think it's important to consider the changes not only in the technology of investing, but also the investors themselves.
The Technology Of Investing
The process of investing in the stock market has changed dramatically during the last 25 years. What once was the exclusive purview of a handful of brokerage houses has become a wide-open market.
When the market was roaring between 1998 and 2000, day traders attracted lots of media attention with their huge daily profits. After the bubble burst, they all but disappeared from the radar.
Younger investors may not remember that at one time you had to physically go to a stock brokerage to open an account to buy and sell stocks. The brokers fixed commissions at what would now seem criminally high rates. When these commissions were deregulated, a new type of stock brokerage emerged--the discount broker. The discount broker charged dramatically lower commissions, but investors received no research or help making investment decisions. Still, the lower commissions and the ease of dealing with the broker over the phone drew more investors into the stock market.
The next revolution occurred when the Internet gave birth to online stock brokerages. Their rates were even lower than discount brokers, and investors could do all their business online. Coupled with a booming economy and the hysteria associated with Internet/tech stocks, online investing exploded. Problems with broker Web sites crashing during heavy volume dulled some enthusiasm, but it didn't blunt the desire to trade.
With full-service brokers considered by many investors a thing of the past, investors who opted to trade with discount brokers (both on- and offline) had to do their own research, which is where the Internet really changed the playing field. Literally hundreds of Web sites offering information, research, and advice compete for investors' attention. You have access to more information today than at any time in history.
Not all Web sites are equal. There are a number of great resources online, but there are also a number of thinly disguised sales pitches posing as "information."
The downside of this flood of information is the possibility that investors will panic or make hasty decisions based on information they receive in nearly real time. There have already been numerous cases of stock fraud by crooks using the Internet to spread false "news" about stocks in an attempt to manipulate the price. Admittedly, the big institutional investors and mutual funds are still the ones that dramatically affect the stock market, not individual investors.
There is no guarantee that individual investors won't panic as they did in the 1929 stock market crash. However unlikely this scenario is, you can't dismiss it.