Study Shows That "Everyone" Did Not Lose Money
in the Recent "Bear Market"

ime after time, one hears that "everyone" lost money in the recent bear market, with some observers claiming that we had experienced nothing like it since the Great Depression. However, those claims are wrong. A reputable study shows that the bear market actually was a narrow one. Only selective stocks comprised the "bubble," and largely only those stocks were hard hit.

The study is entitled, "Anatomy of A Bear Market." It was authored by Timothy M. Koller and Zane D. Williams, and published in the Winter 2003 issue of McKinsey on Finance. The authors find that between January 1, 2000 (the start of the bear market) and October 31, 2002, the share price of 40% of the companies in the S&P 500 index actually increased! The share price of 50% of the companies in the S&P 500 index either increased in value or decreased by less than 10%. That said, the authors note that the S&P 500 index was down 37% during that same time period.

What explains this disparity? One reason is that investors have relied upon the S&P 500 as a proxy for "the market." Investors believe, wrongly, that they can measure the performance of stocks in the market by examining the performance of the S&P 500. They cannot do so, because the S&P 500 is "capitalization weighted." That means that the S&P 500 index gives more weight to stocks with larger market values, thereby causing those stocks to have a greater impact upon the performance of that index.

Indeed, Koller and Williams conclude that the company stocks that tanked during this period largely were limited to technology and telecommunications stocks as well as stocks of extremely large companies (known as megacapitalized stocks).

First, regarding technology and telecommunications stocks, the authors find that these sectors were down far more than any others. While the technology sector was down 64% and the telecommunications sector was down 60%, all other sectors were up or slightly down, as shown in the chart below dissecting the S&P 500 index during the period January 1, 2000 through October 31, 2002:

SECTOR	RETURNS, PERCENT	NUMBER OF COMPANIES
Consumer Discretionary	+4	87
Consumer Staples	+21	34
Energy	+12	25
Financials	+19	75
Health Care	+29	44
Industrials	+7	68
Information Technology	-64	75
Materials	-10	37
Telecommunications	-60	10
Utilities	+2	36
OVERALL SAMPLE	-3	500

This table demonstrates that the market, as measured by weighing all sectors equally in the S&P 500, lost only 3% during this purported "bear market."

Second, the performance of the largest companies in the S&P 500 index also distorts the market averages. Koller and Williams write that the market bubble saw the emergence of megacapitalized stocks, which are those stocks with market capitalization greater than $50 billion. Like technology and telecommunications stocks, these megacap stocks suffered a large setback in the bear market, as shown in the table below dissecting the S&P 500 index during the period January 1, 2000 through October 31, 2002:

MARKET CAP,$ BILLIONS	RETURNS, PERCENT	NUMBER OF COMPANIES
>$50	-37	49
$25-$50	-33	46
$10-$25	-19	110
$5-$10	+4	138
<$5	+23	157
OVERALL SAMPLE	-3	500

This table demonstrates that the market, as measured by weighing all stocks equally in the S&P 500 regardless of size, lost only 3% during this purported "bear market."

What is the combined, quantifiable impact of these two factors upon the S&P 500's reported 37% loss during this period? The authors conclude that 25 percentage points of the "market's" 37% point decline was due to the losses in technology and telecommunication stocks. Another 10 percentage points of the 37% point decline were attributable to the decline of the megacap stocks. Only 2 percentage points of the 37% point decline were due to the other 378 companies in the index!

To summarize, not "everyone" lost money in the bear market. This study proves that investors would have experienced sizable gains or suffered only small losses had they stayed clear of technology and telecommunications stocks and, to a lesser extent, had they stayed clear of stocks of the megacapitalized companies comprising the S&P 500 index.

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James J. Eccleston is a securities attorney, representing investors as well as brokers and brokerage firms nationwide in arbitration, litigation and regulatory matters. He maintains an informative website at www.FinancialCounsel.com. He is an equity partner with Shaheen, Novoselsky, Staat, Filipowski & Eccleston, and can be reached at 312-621-4400.