The stock market is crashing, slowly, and in plain view of the people who count on it most. The 53% plunge in the Dow Jones industrials since October 2007 has wrecked the college- and retirement-savings plans of millions of investors.
It has permanently lowered the long-term investment projections of private endowments and pension funds. It has sent corporate compensation experts scrambling to figure out how to reward top employees.
All told, more than $ 10 trillion of stock market wealth has vanished, and with it the confidence that springs from financial security.
While 17 months may feel like an eternity, it could turn out merely to be a prequel. The questions on the minds of investors, money managers, and corporate executives are threefold: How much longer will the bear market last? How low will the averages go? And when might investors get their money back?
History can’t provide as many clues to the market’s direction as usual. That’s because while most bear markets more or less track the business cycle, this one began with a broken financial system. That makes the current bear more like the one that snarled from 1929-32 than others of the past 100 years. But that analogy doesn’t fit perfectly, either. “We have no good precedents to help us,” says Peter L. Bernstein, a 90-year-old market essayist and financial historian who was a teenager during the Great Depression. “What’s breathtaking is the rapidity of the decline and its breadth.”
The market anxiety is especially high now because of the raging fire in the economy. “The next six to nine months are going to be awful,” says Desmond Lachman of the American Enterprise Institute. Waves of corporate defaults, home foreclosures, bank failures, and job losses are still to come.
Cash on the sidelines
Investors have quietly squirreled away $ 9.3 trillion in cash, which amounts to roughly 84% of the market value of U.S. companies. Stocks typically rise after that percentage peaks, according to a recent Bloomberg article. The last eight times the measure hit a high, the S&P 500 rose an average of 24% in six months.
However, this signal hass turned out to be misleading. In normal times, strategists could look with some confidence to money in these accounts as buying power that investors were holding back from the stock market. The greater the cash compared with the value of the overall market, the more impact it could make on stocks. In January the reading reached its highest levels since 1984, says Bjorgen. Even so, he’s dubious. As long as investors are worried about their own incomes, he says, the money seems most likely to stay right where it is. TrimTabs’ Biderman, who tracks how investors move their money among asset classes, says he doesn’t see much chance of this cash flowing into stocks with the job and housing markets so weak. He figures investors have been taking more money out of stocks than they’ve been putting into their cash accounts.
This bear market likely won’t rival that of the Great Depression. But the bear markets during other banking crises have been brutal in their own right. In a recent study of 21 such episodes from around the world, stocks fell an average of 56%—the same loss the S&P 500 had suffered through Mar. 3. Those bear markets also tended to be agonizingly slow, taking an average of 3.4 years to reach bottom.
“Everything is protracted,” says Reinhart. “In the best-case scenario, you are looking at six years or longer” to return to past highs. Bad as that sounds, it would compare favorably with Japan, whose Nikkei index reached 38,900 in 1989 and now trades at around 7,200.
That could mean two more years of bouncing around and then another six or so before the Dow is back above 14,000. Not long ago, such an outcome would have seemed unimaginably bleak. Given the other possibilities, it doesn’t seem so bad now.
Read more …
“Stock Market: When will the bull return?,” Business Week, Mar 5, 2009
“Did Obama Cause the Stock Slide?,” Business Week, Mar 5, 2009
At least on Wall Street, the honeymoon is over for President Barack Obama. Polls still show the President has strong popularity among the general U.S. population, and Obama continues to command power in Congress. But among investors, fairly or unfairly, there is griping that the new Obama Administration is at least partly to blame for the recent slide in stocks. Since Nov. 4, Election Day, the broad Standard & Poor’s 500-stock index is off about 25%, and since Jan. 20, when Obama took office, the “500” is down 15%.
It’s never easy to determine exactly why the stock market moves in a particular direction. Plenty of other factors have influenced stock prices since November. For example, the global economy has slowed further and the outlook for corporate profits has worsened. But BusinessWeek interviewed a wide array of investment professionals, and many said the first six weeks of the Obama Administration have soured their outlook on the stock market.
“What history tells us about the stock market,” Wall Street Journal, Oct 11, 2008.
We have been in a “bear market” since Jan 2000, when the dot.com bubble burst. “We’re dealing with fundamental and profound uncertainties.” The entire nation is in the grip of what psychologists call “the disposition effect,” or an inability to confront financial losses. Investors who have either the enterprise or the money to invest now, somewhere near the bottom, are likely to prevail over those who wait for the bottom and miss it.