How to shake the bear market funk
New York and Atlanta 鈥� Emergency interest-rate cuts. A presidential speech meant to calm the financial markets. New government authority to buy from financial institutions as much as $700 billion worth of bad mortgage-related debt 鈥� all designed to reopen the world's clogged credit markets.
But Wall Street, gripped by a negative and increasingly entrenched psychology, is so far is shrugging off most of these herculean rescue efforts. After the worst week in the history of the stock market 鈥� with the Standard & Poor's 500 down 18.19 percent for the week 鈥� what will it take to make the sellers of stocks into confident buyers again?
It鈥檚 not a new question. In almost every severe market downturn, investors at some point see only the gloom and doom. Here鈥檚 what ultimately dispelled previous dark clouds:
鈥n August 1982, the Federal Reserve abruptly reversed course and began cutting interest rates. It sparked a bull market that sent S&P 500 stocks soaring 229 percent over five years.
鈥mmediately after the crash of October 1987, then-Fed Chairman Alan Greenspan threw money at the banking system, resulting in a bull market that pushed stocks up 65 percent over 2-1/2 years.
鈥n 1990, following a run-up in oil prices and a recession, the Federal Reserve cut interest rates and the S&P 500 jumped 417 percent over the next 9-1/2 years.
鈥y March 2003, after the bursting of the dotcom bubble, the excesses were finally wrung out of the markets. The resulting market increase ran until 2007, and stocks climbed 101 percent.
What will it take now?
Time, primarily, say some stock market strategists. That鈥檚 the view of Sam Stovall of Standard & Poor鈥檚 in New York, who notes that the $700 billion bank rescue plan won鈥檛 actually be implemented for about another month. 鈥淧eople expect it to be working already,鈥� he says. 鈥淚t鈥檚 like if I plan on losing weight and I joined a health club that won鈥檛 be open in November, and people are upset that I haven鈥檛 lost weight yet.鈥�
Next week might still be a little dark, Mr. Stovall worries, because many investors will get their brokerage statements over the weekend. 鈥淲e could have one last wringing of the towel,鈥� he says.
It also might take yet more government action, says Fred Dickson, chief market strategist at D.A. Davidson in Lake Oswego, Ore. He would like to see the Federal Deposit Insurance Corp. guarantee all deposits at all banks. Corporate treasurers and big investors are withdrawing their funds from banks to protect their assets, he says. 鈥淭here must be a flow of funds back to the banks,鈥� he says. 鈥淲e need a big enough stick to turn around confidence in the banking system.鈥�
This weekend, when finance ministers from the G-7 industrialized nations meet in Washington, presents an opportunity to reassure the public that there will be no more bank failures, says Bill Stone, chief investment strategist at PNC Financial in Philadelphia. 鈥淚f they say, 'If you are otherwise solvent, we will guarantee your bonds,' that would help,鈥� he says. 鈥淩ight now there is so much negative outlook, any positive news can be the catalyst.鈥�
Most investors just want the wild stock-market ride of the past two weeks to be over, and professional money managers usually warn them against trying to pick the bottom in bear markets.
One is Bob Markman of Markman Capital Management in Edina, Minn., who does not expect the markets to turn around until people give up in despair. He counsels that there's no need to rush back in. 鈥淲hen the market turns around, it typically rises 30 to 50 percent, so who cares about missing the first dozen percent,鈥� he says. 鈥淵ou should start buying when things start moving up, not down.鈥�
Investors on Main Street, however, cite other actions that would begin to restore their confidence that the economy will pull through this crisis. Bob Indech of Norcross, Ga., an engineer, would like to see Congress permit the US government to loan money directly to the 4 million or so Americans in danger of foreclosure. The free-falling housing market, he says, has wrecked the ability of financial institutions holding mortgage-related securities to accurately "mark to market" the value of those assets, forcing them to sit on their cash reserves and cinch in lending lines.
Bailing out homeowners directly would not necessarily appease Wall Street, says Mr. Indech, who estimates he has lost about 20 percent of the paper value of his own investment portfolio in the past month. But it would address the fundamental problem of the crisis in a way that the existing rescue plan has not. He estimates it would also be a cheaper solution, costing perhaps $35 billion.
鈥淵ou can鈥檛 have a trickle-down philosophy for a crisis problem. It doesn鈥檛 work,鈥� says Indech. 鈥淵ou don鈥檛 pay [banks] to influence their behavior in the hopes that they will then behave in the way you want them to behave. The problem is not Wall Street, it鈥檚 Main Street. It鈥檚 simple, but people who live in ivory towers and have million-dollar salaries just don鈥檛 see the problems of the poor people on Main Street. It鈥檚 not in their understanding.鈥�
To some others, it doesn't help that all this financial uncertainty is coinciding with political uncertainty over who will be the next US president. That鈥檚 the view of former investment banker Mark Small, now an information technology director at an Atlanta firm. He estimates he鈥檚 lost at least 25 percent of his stock value in the past week.
Mr. Small says Sen. Barack Obama鈥檚 widening lead in national polls over presidential contender Sen. John McCain has sent a signal to investors that change is coming 鈥� to wit, that Democrats are likely to control both Congress and the White House.
鈥淲henever there鈥檚 a political change in Washington, you see people start pulling their money out,鈥� says Small. 鈥淭he bottom line is people aren鈥檛 sure where [the next administration] is going to take us.鈥�
Some of Small鈥檚 investor friends are now urging him to buy up stocks at bargain-basement prices, but he so far hasn鈥檛 moved. Buttressing the Wall Street meltdown are job concerns, he says.
鈥淭here鈥檚 a real fear out there that they鈥檒l come in and say, 鈥榃e鈥檙e eliminating your department,鈥� and then you鈥檙e out of a job,鈥� says Small. 鈥淭hat makes betting on stocks riskier, since you may be in a situation where you need the money, and now you suddenly have a lot less money if you need to take it out of the market.鈥�
