Will the R-word incite the bears?
Recession may well be here, given the dismal February employment report Friday. But on Wall Street many investors still are having a hard time deciding how worried they should be.
The Dow Jones industrial average slid 146.70 points, or 1.2%, to 11,893.69 for the day, falling through the recent nadir of 11,971 it set on Jan. 22 and finishing at its lowest level in 17 months.
Yet by the classic measure of a bear market -- a drop of at least 20% in share prices -- the Dow is a holdout: It’s down 16% from its record high reached in October.
The broader Standard & Poor’s 500 index also remains above the bear-market threshold, despite mounting evidence of recession. It has lost 17.4% from its October peak.
These numbers are handy enough for gauging the damage done. But what every investor would like to know is: How much worse will it get?
If you figure that a 17.4% drop in the S&P; 500 is just a prelude to a loss of, say, 40% by the time the market’s sell-off has run its course, you might well opt to take some money off the table and wait it out.
You know what you’re going to hear from much of Wall Street at a time like this.
Brenton Luce, a portfolio manager at hedge fund Lakefront Partners in Cleveland, writes on his blog that investment pros’ usual advice to clients in down markets is to “stay long-term focused.” That, he notes, “is code for, ‘Yes, we have lost you a bunch of money lately. But we hope that the market turns positive soon and we hope that you stick with us until this happens.’ ”
It wouldn’t be surprising if the blue-chip stocks in the Dow and the S&P; 500 were the last refuge for investors who’ve given up on other sectors of the market. Smaller stocks, for example, now are in bear-market territory, with the Russell 2,000 index of small-company issues off 22.9% from its all-time high set in July.
Still, you might have expected a lot worse, given the trauma in the financial system from the housing bust and its collateral damage.
The credit crunch stemming from banks’ massive losses on delinquent home loans is showing few signs of un-crunching. Money remains very tight, and money is what financial markets need to rally.
The stock market’s slide this week was fueled in part by worries about Fannie Mae and Freddie Mac, the two government-sponsored mortgage-finance giants that are supposed to help stabilize the housing market by stepping up their purchases of home loans.
The companies’ stocks fell this week to their lowest levels in 12 years, and some investors became reluctant to buy the firms’ mortgage-backed bonds, which in theory are of the highest-quality.
That may have been too much for the Federal Reserve to brook. On Friday the central bank announced a major expansion of its emergency lending program for banks, aiming to ease the credit squeeze.
As for stocks, some market pros say investors’ moods might actually improve if Fed officials and the White House would stop talking as if recession were avoidable.
“We know it’s not good, but they’re trying to pretend it’s OK,” said Jim Bianco, head of Bianco Research in Chicago. “They should start by being honest. Then we can talk about what it is we need to do” in terms of fixing the economy.
Despite the credit markets’ continued deterioration, some money managers are betting that the stock market won’t get much worse.
A bottom “isn’t that far away,” said Jack Ablin, who oversees about $50 billion as chief investment officer at Harris Private Bank in Chicago. He figures the S&P; 500 could fall another 5% or so, which would take it modestly over the 20%-loss mark.
A much deeper decline, he said, would only be justified if corporate earnings collapsed in a serious recession, which he isn’t expecting.
If Ablin is right, it’s too late to lighten up on stocks, and this won’t have been much of a bear market once it’s over.
For investors who can’t bear the risk of much heavier losses, however, it’s worth remembering that the right amount of money to have in the stock market is whatever sum you can keep there and still sleep well at night.
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Bear tracking
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Generally, the threshold for a bear market is a 20% drop in key stock indexes. Where major indexes stand now:
*--* -- Decline from Index 2007 peak NYSE composite -15.9% Dow industrials -16.0 S&P 500 -17.4 S&P mid-cap -17.8 S&P small-cap -20.9 Nasdaq composite -22.6 Russell 2,000 -22.9 Bloomberg REIT * -35.6 *--*
*Real estate investment trustsFile name: FI-petruno8
Source: Bloomberg News
