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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Paul Senior who wrote (15609)	10/9/2002 12:26:45 AM
From: E.J. Neitz Jr	Read Replies (1) \| Respond to of 78618

1974 Redux: Why Bear Market May Be Over candals abound, and once-powerful men are negotiating plea bargains. The stock market has lost nearly half its value and has just endured its most volatile — and worst — quarter in more than a decade. In other words, it feels like late 1974. And that was a fine time to buy stocks. It was in the third quarter of 1974 that the stock market, already battered, was knocked out. Nearly every stock went down, regardless of quality. Volatility climbed to levels not seen since the Great Depression. Inflation, recession and Watergate combined to depress investors. And then the bear market ended. The quarter just ended was not quite as bad as the one in 1974 — the Standard & Poor's 500-stock index fell 18 percent, not 26 percent — but volatility was even higher, and more than 90 percent of the stocks in the S.& P. 500 declined. None of that proves, of course, that the bottom has been reached. In 1974, it was reached in early October, then tested in December. This year's low came in late July, then was tested in September. In each year, the Dow Jones industrials set new lows during the later test, but the S.& P. did not. Stocks are nowhere near as cheap now as they were in 1974, when single-digit price-to-earnings ratios were common. But Steven Leuthold of Leuthold & Company, a longtime market watcher, says that valuations are back to the median level of markets over the last 45 years and that most bear markets end near that median. As for scandals, it may be noted that the final plunge in 1974, of 23 percent, came in the 55 days after President Richard M. Nixon resigned. This year, the final decline, of 23 percent, came in the 50 days after L. Dennis Kozlowski, whose greed may come to symbolize this era, was forced out of Tyco. At the low in July, as at the 1974 bottom, the S.& P. was off 48 percent from its previous peak. Bear markets often end before the economy hits bottom. Share prices turned up months before the 1974-75 recession ended, and years before it was clear that the economic concerns of that era would be dealt with effectively. And the market advances that followed differed from those that preceded the peak. The Nifty Fifty growth stocks — which some had thought could be bought at any price because their outlook was so good — did not do well. The winners in a market recovery now are not likely to be the technology companies that investors once expected to grow to the sky. Now there are fears of a double-dip recession. The economic data are mixed, but the market action makes it clear that a slowdown is expected. Cash is flowing into safe bonds paying low interest rates, simply because investors fear more stock plunges. The risks of rising interest rates have been forgotten. In 1974, investors rightly feared that the coming years would not be nearly as good as the 1950's and 1960's had been. But that did not keep stocks from recovering. "It was not that the anxieties about a difficult economic period were wrong," said Robert J. Barbera, the chief economist of ITG/Hoenig. "It was that they had already been discounted." There is, of course, no assurance that a worldwide recession — or a bad result from an Iraqi war — would not send prices plunging again. But stock prices do not indicate, as they did in early 2000, that investors are confident that everything will go right. This is the kind of environment in which stocks can exceed expectations. The great bear market could be over. New York Times