usatoday.com
i agree.
complacency is still very much alive.
Where's the bottom?
By Adam Shell and Matt Krantz, USA TODAY
NEW YORK — The worst bear market since the Great Depression just keeps getting worse.
In a water-torture-type decline reminiscent of the 1973-74 bear market, the 2 1/2 year-old slump is methodically hacking away huge chunks of the eye-popping gains posted in the 1990s stock mania.
After falling another 215 points Wednesday to 7286, the Dow Jones industrial average is back to where it was in October 1997. The selling that began in early 2000 has robbed the blue-chip average of nearly half of its four-fold gain posted in the go-go 1990s.
Wildly optimistic predictions of Dow 36,000 have been replaced by a chorus of pessimists calling for Dow 6000 — or even lower. Many traders now say they would actually welcome a scary one-day massacre to put an end to the selling once and for all. "One more purge down," will probably bring buyers back, says Kevin Lane, chief market strategist at Technimentals Research Group.
The 180-degree mood shift has individual investors worried and wondering how much further stocks — and their retirement nest eggs — will fall. It was one thing to watch fly-by-night Internet stocks that didn't make money melt to zero. But when stocks with blue-chip pedigrees such as General Electric, General Motors and McDonald's tumble to 52-week lows with ease as they did Wednesday, it's far more worrisome and has the potential to scare individual investors out of the market for good. All three American icons are down roughly two-thirds from their all-time highs.
Many investors are starting to feel powerless. "I'm not taking money out; I don't know what to do with it," says Bob Przybylski of Midland, Mich., who has lost 50% of his portfolio, or about $70,000, since the market top. "I probably should worry about it, but it was just paper."
But well aware of the destructive powers of a severe bear market, professional investors have done the bulk of the selling recently. "The selling is not from individuals. It's all institutional," says Taai Izushina, trader at Daiwa Securities. Individuals are stunned, too afraid to buy, but also too afraid to sell, he says.
So far there is no evidence that investors are fleeing their 401(k)s. Hewitt Associates, which tracks the activity of 1.5 million 401(k) accounts, says less than 1% of the money it tracks is moving out of stocks.
Some strategists say the market is struggling from a sort of rolling capitulation, where investors gradually give up one by one, rather than en masse. Todd Salamone, head of research at Schaeffer's Investment Research, notes that while investors have been spared from a vicious 22% one-day decline like the October 1987 crash, they're having to suffer something that's even worse: a day-by-day erosion of market value. And that's not likely to change, he says, until investors panic.
Also giving the bear staying power:
Too much riding on stocks. Wall Street strategists, on average, are still urging investors to have 68% of their money in stocks, Salamone says. That's well above the 49% stock allocation they recommended when the market bottomed in late 1994.
Too little cash. And mutual fund managers are still way too bullish. Funds only have 4% to 5% in cash, Salamone adds. At market bottoms, nervous fund managers typically sell so much stock that they have about 10% of their portfolios in cash.
Indeed, there's a growing concern on Wall Street that individual investors will start dumping stocks after they open their quarterly mutual fund and 401(k) statements and see just how big a hit they took. The average mutual fund fell 17% in the July through September quarter, according to fund tracker Lipper.
William Strauss, a 56-year-old physician in Boston, says his wife urged him to abandon stocks after ripping open their most recent statement showing the couple has lost nearly 40% of their portfolio since March 2000. "She's been saying, 'Maybe we should sell it and park money on the side,' " he says. Strauss has lightened up and isn't putting any fresh money into stocks. He's selling some of the holdings he considers "dogs," such as Hewlett-Packard and Morgan Stanley. He's also turning to real estate for income.
Relief around the corner?
It is that type of pessimism that typically signals a final washout that clears out all the people who want to sell, paving the wave for a rebound. Other signs of a market bottom abound. This week, Mutual Funds Magazine shut down. Money pouring into the benchmark 10-year Treasury note — considered a safe haven investment — has just pushed its yield down to a 44-year low. Government bonds have now outperformed stocks in the last five-, 10- and 15-year periods. Many on Wall Street worry that investors may be piling into bonds at the top, just as they piled into tech stocks at the top of the last bull market.
Another sign that pessimism is peaking: Research notes coming out of respected Wall Street shops are starting to address the main premise in Robert Prechter's new doomsday book, Conquer the Crash — namely that deflation poses the biggest risk to the stock market and the economy. Prechter, who predicted correctly that stocks would soar back in '82 and told people to flee stocks before the 1987 crash but turned bearish shortly after, predicts the Dow will fall below 1000 when all is said and done.
Perhaps the biggest sign of a bottom, however, may be the Dow's dire predicament. History suggests that if the Dow hasn't yet hit bottom, it is at least nearing a point at which selling has dried up.
Indeed, if the previous eight bear markets going back to 1962 are any guide, a lasting stock market bottom is unlikely to occur until the Dow gives back at least 50% of the 9,358 points it gained from its October 1990 low to its January 2000 peak of 11,722.98.
"There hasn't been a single bear market in the last 40 years that hasn't ended without the Dow retracing 50% of its prior bull market gains," says James Stack, president of InvesTech Research.
For that to happen the Dow would need to fall 242 more points to 7044, a 3.4% drop from Wednesday. The Nasdaq composite and Standard & Poor's 500 have had their bull-market gains sliced in half. The Dow is close, having given back 47.4% of its gains.
Some say the bull actually extends back to 1982, since the bears of 1987 and 1990, although severe, were quite short. A 50% retracement of the Dow's gains from the 1982 low would take it back to 6250 (that's nearly 200 points below where the Dow was in December 1996 when Fed Chairman Alan Greenspan made his infamous "irrational exuberance" speech).
More potential problems remain
Skeptics say given the weak economy, a potential war with Iraq and a tepid rebound in corporate profits, the Dow could fall even further. Steeper declines are not unprecedented. Bear markets in 1969-70 and 1973-74, for example, more than wiped out all of the Dow's bull market gains. "The end of a bear cycle is marked by weakness across the board," says Bob Dickey, managing director at RBC Dain Rauscher.
True to form, so-called "safe haven" Dow stocks — the bluest of the blue chips — are on track for a seventh straight week of losses. Now that the Dow is trading at new lows and below 7500, a key level that marked the low point of the Asian currency crisis in 1998, another move down is possible.
A drop to 5900, or roughly 50% below its all-time high, can't be ruled out, says Technimentals' Lane.
Hugh Johnson of First Albany notes that if the Dow dropped to roughly 6000, it would reduce its price-to-earnings ratio to about 15, back in line with historical levels. That could bring buyers back in.
But even if a big decline does bring prices down to tempting levels, the market still must get past a big hurdle in the form of mounting evidence that corporate profits won't grow anywhere near what was previously thought.
Analysts continue to slash estimates at an accelerating pace. Analysts now expect earnings will only grow by 5.5% in the third quarter, down from the 16.6% they expected in early July, Thomson First Call says. And estimates for next year are also being slashed. Analysts think earnings in 2003 will be up 17.5%, vs. the 20% gain they were calling for on July 1.
But some say the biggest problem is that investors are still too optimistic. Consider Mike Newhall, 32. First, he got laid off by the struggling Internet portal Altavista. Then he lost his entire $400,000 portfolio on risky Internet stocks. Even so, Newhall, still unemployed and living in Boston, remains bullish and says he'd buy stocks again, if he had money: "The market will come back. I hope I'll have money to get back in."
Contributing: John Waggoner |
