CATCH THE BOTTOM!
by Grant's Investor Staff 07:00 AM 08|10|2001
Plunging earnings coupled with a bond market rally may presage a recession-busting turn in stocks.
Whether or not P.T. Barnum was literally right about suckers entering this world at the rate of one per minute, rallies in the midst of bear stock markets surely swell the overall totals. Suckers' rallies, in fact, are an integral part of a bear market, as investors who misjudged the April-May and June-July upturns can now attest. It's not easy sailing a profitable course in these tumultuous seas. We wish to help by inviting readers to climb to the crow's nest with us and keep on the lookout for the indicators International Strategy & Investment Group (ISI) says may presage a lasting market rebound. The key to catching the bottom may lie in what's happening over in bondland, but we're getting ahead of ourselves.
It's not news that the stock market usually soars before recessions end. The visual evidence is to be found in the accompanying graphs plotting the ups and downs of the Standard & Poor's 500 Index since 1969. But what may not be common knowledge is the corresponding link to dreadful profit peformance. ISI has connected all the dots, and it reports that recession-ending rallies invariably come in quarters when corporate earnings are in the dumpster. When stocks rallied in 1970, 1975, 1982 and 1991, for instance, S&P 500 operating earnings were down between 11.7% (3Q70) and 22.6% (1Q75), with the average decline coming in at 16.5%.
Obviously, not every down quarter portends a market bottom, or, as ISI drolly puts it, "you have to time which down quarter for earnings." And that's where the bond market comes in. Recession-busting moves in the stock market typically are accompanied by -- maybe even "initiated" by, ISI suggests -- rallies in the bond market, something that was noticeably lacking in the recent, short-lived equity run-ups. In other words, until the climate is right for stocks and bonds to rise in tandem, don't be led down the primrose path, shabby earnings reports notwithstanding.
As for when all three elements will finally come together in that climactic event that ushers out the current economic-slump-cum-recession, we don't dare to speculate. But would-be market timers may now have some signposts on which to hang their optimistic projections.
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