Posted on: Monday, October 7, 2002

History hints at stock rebound

By Robert Dieterich
Bloomberg News Service

NEW YORK — History suggests that when U.S. stock market losses get as big as they have been the past three months, a turnaround is near.

Since World War II, every time the Standard & Poor's 500 Index fell 15 percent in a quarter, the index gained in the subsequent three-month, six-month, 12-month and 24-month periods, according to Ned Davis Research Inc., an analysis firm in Venice, Fla. The index fell 17 percent in the quarter ended Sept. 30.

"I'm fully expecting a significant rebound," said Robert Morris, who oversees $46 billion as chief investment officer at Lord Abbett & Co. in Jersey City, N.J.

The depth of the losses and the fact that the selling has extended to most industry groups suggests that investors inclined to sell have done so, Morris said. There's now a "very high probability" that stocks will gain 40 percent or 50 percent in the next few years, he said.

He has recently bought shares of telephone companies such as Verizon Communications Inc., the biggest gainer in the S&P 500 this week, and SBC Communications Inc.

A rebound would provide some consolation to the individuals and institutions that have lost a collective $8.5 trillion of stock market wealth — as measured by the slide in the Wilshire 5000 Total Market Index — since the market's peak in March 2000.

Some investors reject the idea that what has happened to stocks in the past says anything about stocks' future course.

"As an economist, I can tell you that I can make statistics say anything," said Robert Goodman, senior economic adviser at Putnam Investments in Boston, which oversees $250 billion. "The underlying consideration has to be the health of the economy."

"I wish I could say this is the end" of the losses, said Charles Bath, who helps manage almost $100 million at Diamond Hill Investment Group in Columbus, Ohio. "When you're in bear markets like this, they don't tend to end until we overshoot on the downside."

Including the three months that ended Sept. 30, the S&P 500 has dropped 15 percent in a quarter on a half-dozen occasions the past 50 years.

The 23 percent decline in the fourth quarter of 1987, which included the October crash, was followed by a 12 percent rise over four quarters and 43 percent the following two years.

Morris said the best comparison for today is the 1973-74 bear market: "It looks like a carbon copy."

The S&P 500 lost 26 percent in the third quarter of 1974, when President Richard M. Nixon resigned, which marked the end of the rout. A year later the index had climbed 32 percent; two years later the gain was 66 percent.