 Half-point reduction by Fed appears likely
USA Today
The bear market began in March 2000 and few expect that yesterday’s rally, which pushed the Dow Jones industrial average up 83 points and the Nasdaq up 91 points, is the end of it.
The question for most investors, then, is: "When will it end? And how long will it take me to break even?"
History has some answers. The Leuthold Group, a market advisory company in Minneapolis, looked at the 20 bear markets since 1900. It also looked at how long it would take for a hapless investor who invested in the Standard & Poor’s 500 stock index at the very top to break even.
The median break-even time — half were higher, half lower — was just shy of three years.
Whether this bear market ends quickly or drags on for years is anyone’s guess. But there are basically three ways it could play out:
The grizzly bear
In the 1929 crash that ushered in the Great Depression, the stock market fell a bone-crushing 89 percent. Investors didn’t break even for nearly a quarter of a century. Even if they reinvested dividends — something difficult to do in the Depression — it took 14 years before investors were whole again.
In the 1973-74 bear market, when the S&P 500 fell 45 percent, investors didn’t get even for seven years and seven months.
Could it happen again? Sure. Mark Zandi, chief economist at Economy.com, points out that investors have lost nearly $4 trillion since the stock market peaked last year.
Throughout much of the late 1990s, the economy boomed because of the so-called wealth effect: People spent more because their portfolios made them feel wealthy.
No more. In the worst case, lower stock prices could lead to lower consumer confidence, which leads to a sickening spiral of lower demand, lower corporate earnings, and yet lower stock prices.
"The stock market’s tentacles run deep into the economy," Zandi says. "So many more people own stocks than any time in history."
Even seasoned investors are worried, particularly since the Nasdaq’s plunge since March 10, 2000, is more severe than its fall in 1974. "I was in the 1973-1974 market," says Frank Cappiello of McCullough Andrews & Cappiello. "This is worse."
John McGinley, editor of the Technical Trends newsletter and another 1973-74 veteran, agrees. He figures that the current bear market has to get far worse if only because the bull market that preceded it was much stronger.
"I’m on record that the Nasdaq will be down 75 percent and the Dow will be down 50 percent," he says. "It’s not price alone that wipes out the bull market. It’s time. The bear has to relentlessly hammer investors until despair takes over."
When investors are in utter despair, he figures, the bear market will be over. "Call up five friends and ask them if they’re still checking their stocks," he says. "If they say no, it’s over." And then wait. If the bear is as bad as 1973 to 1974, the worst in the post World War II era, it could be seven years before you break even.
Your basic bear
Even if we’re in a typical bear market, it will be unpleasant for most investors. There hasn’t been an average-length bear market since 1980.
The average bear market lasts 17 months and claws the S&P 500 down 37.5 percent, according to InvesTech Research, in Whitefish, Mont. The current bear market is a year old and has pulled the S&P 500 down a bit less than 20 percent.
Most experts are banking on a traditional bear market — and it could be nearing a bottom, they say.
After suffering double-digit declines, the Dow and S&P 500 are "fairly" valued and should rise 8 percent to 10 percent within the next year, says James Paulsen, chief investment officer at Wells Capital Management.
Steve Leuthold, president of the Leuthold Group, agrees. His reasoning: Stocks typically start to recover halfway through a recession. The average recession lasts 11 months. "If the recession started in November, we’re just about at the halfway mark," Leuthold says.
Byron Wein, Morgan Stanley’s chief U.S. investment strategist, also thinks the worst might be over. "Maybe we’re not quite there yet, but we are definitely in a bottoming process," he says. If the strategists are right, then the hapless investor who bought at the very top of the market could break even in about three years.
Leuthold has already begun buying. His Leuthold Core Investment fund normally doesn’t have more than 70 percent in stocks. It’s up to 60 percent now. "We’ve weathered most of the storm," he says.
But the Nasdaq may take much longer to recover. It has already suffered above-average losses since its peak at 5048.62 in March 2000. It closed yesterday at 2014.78. It would take a nearly 50 percent gain to hit 3000.
A baby bear
There’s always the possibility that all the gloom and doom in the market is just typical bear-market terror. In 1998, world currencies teetered on the brink of collapse, and investors worried about global depression. Investors started to pull money from stock mutual funds. The S&P 500 fell 19.8 percent.
But the Federal Reserve stepped in, slashing interest rates. Once investors calmed down, the buying began. It was the shortest bear market in history. Within four months, investors were even again.
Could it happen again? Possibly. Typically, stocks begin to rally after the Fed has cut interest rates twice. That makes it cheaper for companies to borrow. And it makes bonds less attractive when compared with stocks. The Fed has already cut rates twice, and is expected to do so again next week.
But few experts are expecting the Fed to spark another rally, or for stocks to blast past their old records soon. For one thing, the market’s speculative mania probably wasn’t caused by the Fed and it probably won’t be reignited by the Fed, either.
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