Many people expect Alan Greenspan and the Federal Reserve to lower interest rates this week in order to boost consumer confidence and aid economic growth in the long run. Whether a rate cut is announced or not, the economy will continue to have challenging times for the next several months. The pendulum is heavy, and it has swung in a new direction. As investors, we need to remember that economic downturns are a natural part of investing in a public market. They are unavoidable.
A bear market is defined as a 20% or greater decline. The Nasdaq has declined a record 56% since its March 24, 2000 high, and the S&P 500 has lost exactly 20%. A 20% or greater decline isn't uncommon. As The Washington Post wrote on Sunday, bear markets have occurred an average of once every five years since 1956.
So, every five years on average, the stock market declines at least 20%. On average, these bear market declines last for about 12 months, although lengths do vary greatly. Afterwards, it has taken an average of 18 months for the stock market to return to previous peaks. This means that every bear market in history has been a good opportunity to buy world-class companies less expensively. This bear market won't likely prove different.
Nobody knows when the "bottom" will be reached, but it will be reached, and we're a lot closer to it than we were one year ago. The most effective action that most of us can take as investors is to continue to average into the stock market whenever we have money to invest for at least three to five years. If you don't have individual companies to buy, average into an S&P 500 index fund.
Given its average return since 1926, $5,000 invested in the S&P 500 for 10 years will grow to $15,000. In 20 years, the investment grows to $45,000. In 40 years, it grows to $407,000. That's just $5,000 put into the S&P 500 index. And if you're investing more money during a decline, you could perform even better in the long run. Now, if only the financial media made this point more often, instead of reacting to each day individually -- as if each day's jerky swing were all-important.
The rise of Human Genome Sciences
The price of Human Genome Sciences (Nasdaq: HGSI) has risen 35% since its February 20 low of $40 per share. Good news drove some of the price increase. On Friday, HGS announced that customer and partner GlaxoSmithKline had positive results in a human trial of a new compound that was discovered in collaboration with Human Genome Sciences. The compound was shown to lower an enzyme associated with cardiovascular disease.
If the trials progress, HGS will receive milestone payments related to each clinical progression, and if a drug eventually reaches commercial use (of course many years from now), HGS will be paid "significant royalties." HGS also has the option of co-marketing any approved drug in this compound class in North America and Europe.
The bottom line: Friday's news helps to validate Human Genome Science's extensive gene research database as a source of potentially important drugs. It also shows investors how extra money can be made from collaborations. In addition, GlaxoSmithKline exercised its right to develop diagnostic tests related to this compound class, and should the tests become commercialized (Glaxo's long-term goal), HGS will receive additional royalties.
Tomorrow, Tuesday Feb. 27th, HGS is holding an investor's conference call to discuss GlaxoSmithKline's announcement. The call is Foolishly open to all investors. It starts at 2:30 Eastern time. You can listen by calling 1-800-294-0494, or 913-981-5520, passcode 418999, before the call starts. A replay will be available until Friday night at 719-457-0820, passcode 418999. We'll be listening to tomorrow's call.
Tom Jacobs and I are also going to speak with Human Genome Science's CEO, Dr. William Haseltine, on Wednesday afternoon. We'll be asking Dr. Haseltine to update us on the company's database prospects: Are new partnerships related to the database imminent? What kind of royalty arrangements is the company seeking? We'll also ask the Big Gene Question -- how many genes do we have, and how accurate is HGS's database? In the past, HGS has believed that humans have as many as 130,000 genes. The Human Genome Project and Celera (NYSE: CRA) recently put the number at closer to just 30,000. Some people now argue that it depends on what you're counting.
If you have questions for Dr. Haseltine, please post them on the HGS discussion board. We'll ask as many of your business-focused questions as possible.
To close with other recent news, last week HGS completed construction of its facility for the manufacture of antibody drugs for use in human clinical trials. This facility can also be used to produce human therapeutic proteins for clinical trials. The shiny new facility moves HGS another large step toward being a fully-integrated pharmaceutical company that discovers, tests, manufactures, and then markets its own drugs. This is a long-term vision, and it's fun to watch the pieces get put in place one by one. For instance, there isn't the need for a large marketing team at HGS yet, but once HGS has drugs, that team will grow.
Have a great week. Fool on!
Jeff Fischer is considering having himself frozen for five years. If he does, he wouldn't feel a need to change his portfolio first, nor would he feel that he'd miss much potential by being frozen. Stocks will do what they do. To see his portfolio, view his profile. The Fool is investors writing for investors.