Is Stocks’ Slump Ending --or Just Getting Started?
How much worse will it get for the stock market?
On Wall Street, it’s clear that there are two distinct schools of thought on that question.
An apparent majority of market analysts say the selling that has knocked the Dow Jones industrial average 10.7% off its August peak--and many stocks much more than that--may intensify in the next few days or weeks.
But many in this camp don’t believe the losses to come will be massive. What’s more, they expect that any additional market slide will be over relatively quickly, and probably will set the stage for a rally later in the year and into 2000.
“This period of grinding uncertainty is probably going to be with us a few weeks more, but I can see the light at the end of the tunnel,” said Peter Canelo, investment strategist at Morgan Stanley Dean Witter in New York.
The Dow might slip back an additional 300 points or so, or about 3%, to 9,800, and the Nasdaq composite index could drop 200 more points, or about 7%, to about 2,500, Canelo said.
But the pessimistic camp on Wall Street argues that the market has only begun its downturn. Rather than a fast snap-back--the usual scenario in the 1990s--this group believes a protracted bear market is underway, driven in large part by rising interest rates engineered by the Federal Reserve.
“We are not only in one of the most overvalued markets in history, but we’ve now gotten some signals that we could well be in a bear market,” said Peter Eliades, editor of the Stockmarket Cycles newsletter in Santa Rosa, Calif.
A bear market is usually defined as a decline of 20% or more in major stock indexes such as the Dow or the Standard & Poor’s 500.
Both the Dow and the S&P; 500 came close to a 20% loss in late-summer 1998 but quickly rebounded. Neither index has eclipsed the 20%-loss threshold since the bear market of 1990.
Ironically, the bullish case now rests partly on the fact that although the Dow and the S&P; 500 haven’t declined precipitously, the broad market has been in a severe downturn most of the year.
In fact, since April 1998, more stocks have been going down than have been going up. Of the stocks in the S&P; 500, for example, 72.2% are down 20% or more from their 52-week highs, according to research by Markethistory.com.
Some on Wall Street have dubbed this the “stealth” bear market.
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Now the big-name technology stocks that have led the market are finally selling off. When market leaders get hit, that’s often a sign that a pullback is nearing an end, bulls say.
Also, key measures of investor sentiment have turned very bearish recently, and stocks look “oversold” to market technicians who study chart patterns. A surge in both bearishness and oversold conditions is common at market bottoms.
On a fundamental level, meanwhile, corporate earnings are rising at their best pace in four years.
“As I search for reasons why this might be the beginning of a bear market, I say, ‘Why should one begin here?’ ” said Thomas McManus, market strategist at Banc of America Securities.
What about inflation worries and rising interest rates? Again, the bulls’ camp sees the inflation fears as overblown and interest rates close to a peak.
Abby Joseph Cohen, the Goldman Sachs strategist who is one of Wall Street’s most influential bulls, told clients in a note on Monday, “We do not envision noteworthy increases in inflation or interest rates in the coming months.”
Even so, many analysts say the selling may well continue in the near term, especially among leading tech stocks. And the losses could be painful.
Richard McCabe, veteran analyst at Merrill Lynch & Co., thinks the Dow could slide to between 9,300 and 9,500, a drop of as much as 18% from its Aug. 25 high. The Nasdaq index could tumble to between 2,200 and 2,400, a slump of as much as 25% from its Oct. 11 peak, he said.
“If it happens, it’ll feel bad for a week or two, [but] that could get the market to a good low in late October or early November,” McCabe said.
Other analysts, however, say expectations for a market low soon, and with only limited additional losses, underestimate the situation Wall Street now faces.
In each of the last two years, blue-chip indexes sold off heavily in October but quickly rebounded. Because of that, investors have come to believe that market declines are quick affairs.
But true bear markets can be much more drawn-out.
John Bollinger, head of EquityTrader.com, counts 11 bear markets between 1945 and 1987, lasting an average of 1.5 years and slicing 26%, on average, off blue-chip stock indexes.
Bollinger doesn’t predict a bear market today. But he agrees that the big risk present in the current market, and not there in the last two years, is that the Fed is raising interest rates.
“The risk-reward relationship for owning equities has deteriorated from even what it was six months ago,” he said.
Eliades, a longtime bear, said investors shouldn’t be misled by strong corporate earnings and a still-buoyant economy. “There has never been a major top in history where the economy didn’t look good,” he said.
To Eliades and other market bears, the fact that so many stocks have already fallen--and fallen much more than blue-chip indexes--isn’t a sign that a bottom is near but that the market’s underpinnings are badly eroded, setting the stage for much greater losses.
As do many of the most downbeat analysts on Wall Street, Eliades believes stocks are so overvalued that major indexes could fall 50% or more from their peaks.
The last bear market of that magnitude occurred in 1973-74, when the S&P; 500 fell 48% over nearly two years.
But the backdrop was much different then: Inflation was in double digits, interest rates were soaring, the economy was in a deep recession, and corporate earnings were collapsing.
Wall Street’s bulls insist there is no comparison between now and then--and therefore they can’t fathom why the market overall should decline so deeply.
Eliades, however, takes another page from history: Bear markets tend to last one-third as long as the bull market that preceded them. If that rule holds true again, whatever market decline is ensuing could could last for several years, he argues, after a nine-year bull market.
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S&P; Declines: A Look Back
Here are the most significant declines in the Standard & Poor’s 500 index since 1953 and the duration of those declines, in months:
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S&P; 500 Period % decline Months 1953 -15% 9 1956-57 -16 6 1957 -20 3 1961-62 -29 6 1966 -22 9 1968-70 -37 18 1973-74 -48 21 1975 -15 2 1977-78 -18 14 1978 -17 2 1980 -22 2 1981-82 -22 13 1987 -34 2 1990 -20 3 1998 -19 1.5 1999* -12 3
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* Through Monday
Source: David L. Babson & Co.
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Walter Hamilton can be reached at walter.hamilton@latimes.com.
