Published August 09, 2002
NEW YORK – Be careful what you wish for. You may get it.
A much-hyped "capitulation" or "selling climax" is widely expected to herald a stock-market recovery, but it could do just the opposite.
After more than 2-1/2 years of slow-motion wealth destruction, investors are getting fed up and want to see the end of this horrific bear market in stocks. Some are hoping for a snappy, V-shaped plunge followed by a spiffy rally.
While bear-market routs have been known to end with a bang, a bone-jarring finale to the current blood-letting would probably be a disaster.
"There is just too much stock in the hands of the public for this to occur," says Ray DeVoe, publisher of the DeVoe Letter. "There is over $4 trillion in stock mutual funds and the question about a V-shaped climax and recovery, if the public does decide to dump stocks, would run into the classic, 'sell to whom?"'
So the best thing that could happen in today's nasty investment environment is for the market to continue its long, drawn-out decline, interrupted by sharp rallies, until it finally develops a sustainable bottom. In other words, the worst thing that could happen is for investors to panic and throw in the towel. END WITH A WHIMPER
"The final stage may not necessarily be a sharp selloff that clears the air," DeVoe says. "Rather it will be complete exhaustion, followed by (investor) contempt for stocks as an investment vehicle."
Since the bubble burst in March 2000, stocks have behaved in a way that is reminiscent of the 1973-74 market.
Back then, the Standard & Poor's 500 index collapsed by 45 percent, which is approximately the size of the current market slump. The S&P's descent began in January 1973 and the bottom was reached in December 1974 after an agonizing 23 months' slide.
But the hammering didn't end with a bang in the fourth quarter of 1974. Instead it was a whimper of a finish after people got sick and tired of losing money. The current slide has so far lasted 29 months.
Worth recalling is public participation in the market in the 1970s was nowhere near as massive as in 2002. At the height of the stock buying frenzy in the late 1990s, half of American households had a stake in the stock market.
"It is not really a question of how much further the stock market must decline to reach that bottom," DeVoe says. "Instead I think it is more a matter of time until that exhaustion sets in."
Bill Valentine, president of Valentine Ventures LLC, says investors with medium- to long-term investment horizons should stop whining about how much cash they've lost and focus on the market's recovery.
"There are no guarantees but if history is any guide -- and it always is -- the recovery will be shorter than most people expect," he says. "Too often, bear markets are considered for the magnitude of their slide. Rarely is much thought given to the nature and timing of bear-market recoveries."
In 1973-74, it only took the S&P 21 months to bounce back and set a new high by September 1976.
By comparison, bear markets in 1946-47 and 1976-78, brought much smaller losses -- 12 percent and 17 percent, respectively -- but recoveries were awfully long in getting traction. The 1946-47 market rallied to a new peak by July 1950, a "dead zone" for investors that dragged on for 38 months. The bounce to a new high after 1976-78 came 35 months later in January 1981. SIZE DOES NOT MATTER
"The average time it took for bear markets to recover since 1945 is 21 months long," Valentine says. "It also tells you that the recovery period is not a function of how long the market went into a slide phase. Just because we're down a lot doesn't mean we won't be setting new highs in the next few years."
There's a tremendous sense of hopelessness on Wall Street. The buy-on-dip mentality and other market tactics, which had worked wonderfully in the past, are not working. A lot of people have lost faith in the market, and they're questioning the wisdom of the time-tested theory that it's best to be fully invested in stocks.
But it's all part of the shifting function of investors' perception.
Many investors may now be at the third stage of the typical range of emotions after the bull market turned into a growling bear.
Back in the roaring 1990s, there was tremendous hope as stocks soared. Then came the greed as people bought stocks blindly. The predominant mood now is of fear, and the last stage will be despair.
"These market stages are certainly no secret, but it is amazing how many traders and investors fail to recognize and assess the stages and to make plans to protect themselves or take advantage of an opportunity," says Dean Lundell, author of a fascinating book, "Sun Tzu's Art of War for Traders and Investors," (McGraw-Hill $19.95) (www.artofwar.com).
The question people should have been asking themselves during the speculative frenzy in technology stocks was, which stage is the market in and what can I do about it?
"First, people bought them with grand hopes. They saw them rise to incredible prices but became greedy and held on for more," Lundell says. "When the stocks started to trade down in price, people were fearful but still held on. Finally, when the pain of further loss came about, they despaired, capitulated and sold at prices nowhere near where they had been."
Indeed, investors may have reached the point of despair.
A survey by the Gallup Organization in the first two weeks of July found that only 20 percent of investors expected the Dow Jones industrial average, currently around 8,700 points, to claw back to 11,000 within the next year. Seventy-one percent of investors thought it would take longer for the blue-chip index to recover to that level while 4 percent believed the Dow would never get back to that magic number.
For the week, the Dow climbed 5.2 percent to 8,745, the S&P 500 gained 5.1 percent to 909 and the Nasdaq rose 4.7 percent to 1,306.