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The Providence Journal, R.I., John Kostrzewa column
(Providence Journal, The (RI) (KRT) Via Acquire Media NewsEdge) Jul. 13--RIDE OUT A BEAR MARKET: Family finances are already strained by gas at $4 a gallon, rising food prices, falling house values and a recession in Rhode Island that is threatening to cut or freeze paychecks, or worse, put people out of work.
Now there's one more worry -- stocks.
After peaking at a record level last October, the Standard & Poor's 500, a broad barometer of stock market activity, slipped last Wednesday into bear market territory. That means it fell 20 percent from its high.
The other major indexes -- the Dow Jones Industrial Average (the blue-chip index of 30 companies), the Nasdaq Composite (a technology-heavy index) and the Russell 2000 (an index of small-company stocks) -- also have crossed the threshold into bear market territory and are off about 20 percent from their highest points.
To put it in money terms, $10,000 invested in stocks last October, based on the indexes, is now worth about $8,000.
All that shouldn't cause much loss of sleep for investors who plan to hold onto their stocks or mutual funds for the long term. History shows that stocks will bounce back and reward patient investors. Over the 20-year period that ended Dec. 31, the S&P 500 returned an average of 11.8 percent a year, compounded.
The bear market, however, is causing big headaches for people who had planned to sell their stocks or mutual funds this year. They may have planned to use the money for college tuition or to pay for a major expense, such as a car or appliance.
Older people may have been counting on cashing out their equity investments to pay living expenses during their retirement, or to pay for a trip, a vacation home or a recreational vehicle to tour the country.
The falloff in stocks may force them to change plans or push back their retirement dates.
To meet their short-term goals, people may be tempted to borrow money. But the last thing any household or prospective retiree should do is take on more debt, especially during a recession, when jobs and income may be at risk.
The timetable for when stocks will recover and when the bear market will return to a bull market is almost impossible to predict.
That's because there is no typical bear market.
The last time investors faced a bear market was earlier this decade when the tech bubble burst, setting off a two-stage downturn in stocks that lasted from March 2000 to July 2002. During that decline, the S&P was off more than 30 percent.
The bear market in 1987 lasted just three months, but the drop was 34 percent. And most of the decline was on one day: the Oct. 19, 1987, market crash.
The 1973-1974 bear market may look similar to the current one. It was caused by the Arab oil embargo that sent oil prices soaring, precipitating out-of-control inflation and a national recession. The bear market lasted 21 months, or 630 days, and stocks fell 48.2 percent.
Prior to this one, there had been 11 bear markets since 1940, according to calculations by Bespoke Investment Group, of New York, and the average decline of the S&P 500 index during those times is 30.4 percent.
But here's one encouraging fact from history.
Once a decline reaches the 20-percent threshold, the market has suffered most of its losses. For example, the research from the 11 bear markets since 1940 shows that 73 percent of the losses occurred before reaching the 20-percent level. The end of a bear market can be seen only in retrospect, after stocks have recovered 20 percent from their lowest point.
One of the dangers for investors during a bear market is that they despair and, exhausted from worrying, sell their stocks at the bottom of the market. Already, investors have yanked $80.4 billion from domestic equity funds in the past 12 months, according to data from the Investment Company Institute.
One cause of the investor fatigue this summer is that there doesn't seem to be any relief coming soon. The stock market and the U.S. economy are linked and both are showing continuing signs of trouble.
"Historically, the stock market bottoms before economic activity bottoms," Paul Kasriel, an economist at Northern Trust bank, told The Wall Street Journal. "This is not exactly a good omen, because the stock market doesn't appear to be bottoming."
Stocks are a forecasting tool for predicting where the big companies that affect the economy are headed. U.S. corporations are set to report their second-quarter financial results this month, and profits are off.
Earnings at companies in the S&P 500 will fall by 12.8 percent, according to John Butters, of Thompson Reuters. Earnings at financial services companies are estimated to be worse, down 67 percent. The energy sector, bolstered by soaring oil prices, is one of the few areas expected to boost profits, by 28 percent.
The falloff at U.S. corporations, tied to the slowdown in consumer spending, the credit crunch, the housing mess and the spike in energy costs has sliced the gross domestic product. The GDP grew at an annual rate of 1 percent in the first quarter and 0.6 percent in the previous quarter.
Investors can't count on much immediate help from the Federal Reserve, which is torn between fighting inflation by hiking short-term interest rates and curbing a deepening slowdown by cutting rates. There has been no signal from Ben Bernanke, the Fed chairman, that the Federal Reserve will cut rates again. Wall Street analysts have told investors to expect the next rate change to be up from the current 2.0 percent.
The last federal stimulus checks are due in the mail this month. While there is some evidence that people used the checks to boost consumer spending, there is also evidence that much of the money has gone to pay higher gasoline and fuel bills. So the impact on the economy has been less than originally planned.
There's a debate under way in Washington about a second stimulus package, including more rebates, to spark the economy. But Senate Majority Leader Harry Reid, D-Nev., said last week that Congress would have a hard time passing a program before the current session ends on Aug. 8.
Also, the country's in the middle of a presidential campaign and the candidate elected in November will set the economic agenda in the new year. The Democrat, Sen. Barack Obama of Illinois, has talked about another round of rebates. The Republican, Sen. John McCain of Arizona, has focused more on tax cuts to spur the economy.
Either way, the tough economic times will stretch into next year, according to more and more top business leaders and policymakers in Washington. That won't help stocks.
So how long will the bear market last?
Based on data from the last 11, a bear market extended an average of 386 days. Given that average, the current bear market has a way to run. Dated from its start on Oct. 9, this bear is only eight months old.
And once the bulls start to run again, how long will it take for stocks to get back to their peak?
By one estimate, it takes 3.3 years for investors to recover all they lost during a bear market.
So hunker down. Wait it out.
The U.S. economy is resilient and will recover.
Stocks will come back, too.
And this bear market, like all the previous ones, will end.
To see more of the The Providence Journal, or to subscribe to the newspaper, go to http://www.projo.com.
Copyright (c) 2008, The Providence Journal, R.I.
Distributed by McClatchy-Tribune Information Services.
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