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The move toward more-passive investments is part of a broader reconsideration by many investors about what went wrong in 2008 and how they can reposition their portfolios to avoid a rerun of that dismal performance. Active managers promise to beat, rather than match, the market's overall returns and charge fees that can be at least 10 times higher than those of index funds. In a recent survey by Greenwich Associates, about one in five institutional investors said they have recently shifted money away from active managers and into passive index strategies. That is up from just 4% who expected to make that shift when asked from July to October 2008. The active-versus-passive debate is shaping up as a driving force behind industry consolidation. When BlackRock agreed this month to acquire Barclays PLC's Barclays Global Investors, the giant index and ETF business, BlackRock CEO Laurence Fink cited investor efforts to cut costs through passive strategies as an impetus for the deal. "For big money-management houses that underperformed, this trend is bad news," says Mark Keleher, chief executive of Mellon Transition Management, which helps investors switch managers. Thanks in large part to a growing preference for index funds, the Bank of New York Mellon unit is forecasting a record number of asset managers will be replaced in the second half of this year. Mr. Keleher says the moves primarily involve switching from traditional "long-only" active asset managers who invest in stocks and bonds but generally don't hedge or use derivatives, rather than from hedge funds or private-equity firms. A change of heart in the $2.3 trillion public pension industry could quickly slice profits for the large asset managers that serve them. Stock index funds may charge annual fees of less than 0.1% of the money they manage, rarely topping 0.5%; stock pickers charge fees that can range from roughly 0.3% up to 2% of assets. Fees for bond managers are generally lower. Greenwich Associates says that not all of the switches to index funds will be permanent and that some investors will stash their money in index funds until they find new managers. That is partly true for the Fire & Police Pension Association of Colorado, a $2.5 billion pension fund. Chief Investment Officer Scott Simon says he is winding down a derivative-related program, known as portable alpha, and holding those assets for the time being in stock-index funds. The Colorado fund has about 60% of its stock holdings in index funds, up from 40% in 2008. While that figure may come down, he says he intends to maintain a greater index bias going forward. "I see passive being a bigger piece of the portfolio than it has been in past," he says. "More managers seem unable to beat their index." Mellon has found that some pension investors are doing the same thing with their debt holdings. Historically, the difference in performance between the top quartile and bottom quartile of bond funds was about half a percentage point, Mr. Keleher says. Last year, that gap widened to about six percentage points. Rather than try to pick winners, many institutional investors are more worried about being stuck with losers, so they now are choosing index funds.
Active managers, by contrast, can flee bad investments and go to cash, though too often those moves come a tad late. In down markets that means index funds may suffer more, though in the initial stages of a rebound an index fund's full exposure means it's likely to benefit sooner as the active crowd remains on the sideline. Thus, there's not really a clear-cut answer as to whether you should be following the smart money into index funds. Going into an index can make a lot of sense for investors who feel burned by their own investment missteps in recent years. Then again, if you find an active manager with a long history of outperforming the indexes, even if the fees are greater, skipping the passive for the active can still be better for your portfolio.
The scrutiny comes after target-date funds designed for people now in or near retirement hit investors with big losses last year. Funds with target dates between 2000 and 2010 lost 22.5% in 2008, according to investment-research firm Morningstar; those with target dates between 2011 and 2015 lost 28%. The design and performance of target-date funds has become especially critical since 2006, when pension legislation encouraged employers to automatically enroll workers in 401(k) plans and invest their contributions in these funds. The funds held $164 billion at the end of last year, up from $71 billion in 2005. Roughly two-thirds of target-date fund assets are invested through 401(k) and other defined-contribution plans. Fund-industry representatives defended the products, saying they generally performed as expected. The funds "are not designed to be riskless or to provide a guaranteed amount of retirement income," said John Ameriks of Vanguard Group. "Diversification is not insurance." Yet many investors have major misperceptions about target-date funds, some panelists said. A survey of workers conducted in March found that most people who were shown marketing materials from major target-date fund providers came to the conclusion that the products offered some sort of promise, said Jodi DiCenzo of research firm Behavioral Research Associates. Some thought investing in the fund meant they would be able to retire on the target date, or that the funds offered some guaranteed rate of return. A number of observers said target-date fund names were at least partly to blame for investors' misperceptions. "There is no excuse for permitting funds to use a name such as 'Target-Date 2010' that implies the use of a generally accepted asset allocation, only to invest aggressively in equities and other highly volatile asset classes," investor and consumer advocates Fund Democracy and Consumer Federation of America said in a letter to regulators. Target-date funds typically invest in other funds, and a number of panelists criticized these underlying holdings. Some pointed out that many fund companies include only their own funds in target-date products, even though one company is unlikely to have top managers in each asset class. Some panelists took aim at target-date funds' one-size-fits-all approach. Investors should be able to choose among conservative, moderate and aggressive versions of target-date funds so they can better synchronize their risk tolerance with their retirement portfolio, said Rod Bare, director of asset allocation strategies at Morningstar. One proposal debated at the hearing is capping the stock exposure of target-date funds close to the retirement date. But it isn't clear that a lower stock allocation would have provided much buffer against losses last year. The Putnam RetirementReady 2010 Fund, one of the most conservative 2010 funds, lost about 26% last year, roughly in line with the 27% decline of one of the most aggressive funds, T. Rowe Price Retirement 2010 Fund. Major industry players disagree on the best way forward for target-date funds.Charles Schwab Corp., for example, recently boosted bond allocations for target-date funds within 10 years of the retirement date. Others, like T. Rowe Price Group Inc., are defending their existing target-date strategies.
Many managers say that focusing on a short-term event -- in this case, the recent market collapse -- is not the right way to approach these products. After all, they are aimed at long-term investors. Many of the funds that target a 2010 retirement date maintain a 50% or higher allocation to stocks, even long past investors' retirement date, because, managers say, that's the only way to make sure retirees' savings last and beat inflation throughout retirement, a period of about 20 years based on average life expectancy. And it's true that over the long haul, the best-performing target funds have beat the market. But that's little solace for people planning to retire in 2010, many of whom may be forced to delay their plans now that they've seen one-quarter or more of their savings vanish. The five-biggest 2010 target-date funds lost an average of 29% from the start of the market's fall in mid-October 2007 through March 9 of this year. Even with the recent market upswing, those five-largest 2010 funds are still down 16% on average for the year ended June 30, and who knows which way the market will turn next? The results are even worse for those invested in funds with a longer-term outlook. The five-largest 2040 funds are down an average of 26% for the one-year period ended June 30, though at least those savers have more time to make up the shortfall. Not all target-date funds invest alike, however. In fact, that's a major problem with them -- take any two 2010 target-date funds and you may find one is 20% in stocks and the other is 55% in stocks. That makes a world of difference for someone retiring in 2010. For example, the Wells Fargo Advantage DJ 2010 fund is about 27% in equities. That fund is down just 6% in the one-year period through June 30. Of course, when the stock market is steadily climbing higher that Wells Fargo fund won't look as good as some riskier ones. That raises a question: Should target-date funds focus on capital preservation or return on investment? Different investors will have different answers to that question -- most would probably like a bit of both. But funds that deliver a bigger bang for your buck in good times have the potential to slam investors in bad times. And, as with some 2010 funds, that hit can happen right when investors are about to start withdrawing money. Investors, lest you think fund managers are shifting to more conservative allocations in response to their 2008 performance, think again. The equity-focused strategies that helped ramp up losses for near-retirees are still in play. That means, for now, your best bet is to look carefully at what you've bought because managers don't seem to be planning changes to their investing allocations. "The industry has no consensus on what the problems are or if there are problems," says Dallas Salisbury, president of the Employee Benefit Research Institute, a Washington-based research group. "If the industry can't agree on any of that, the obvious answer is, 'If I don't think there's a problem, I'm not taking care of it.' " Fund companies may be forced to make changes if regulators decide to take a tougher stance on these funds' asset-allocation strategies. In mid-June, the U.S. Labor Department and the SEC held an all-day hearing to look further at how these funds work and what their potential failings might be. More than 35 industry consultants, fund managers and consumer advocates testified. The result? There's plenty of disagreement about what target-date funds should and shouldn't be doing, with some saying that these products are little understood by participants or the employers who offer them. But what happens next is unclear. The SEC and the Labor Department have no set time frame for making any changes. Those with a longer time horizon need to ask themselves: Are you willing to take more steep hits to your retirement savings, with the possibility that you'll recover that money in the long years ahead? If not, then take a close look at your target-date fund -- if its strategy is too risky for you, find more-conservative investments in your workplace plan. One alternative: Check out the asset allocation of the target-date fund with a date set to the recent past, such as a 2005 fund. Target-date funds with high equity allocations "are generally looking at providing retirement income until the age of 90, 95," says David O'Meara, an investment consultant with Watson Wyatt. "Those that have lower equity allocations are focused more on [avoiding] short-term market shocks that could change life plans."
To be sure, we've all had our "Aha" moments. They materialize without warning, often through an unconscious shift in mental perspective that can abruptly alter how we perceive a problem. "An 'aha' moment is any sudden comprehension that allows you to see something in a different light," says psychologist John Kounios at Drexel University in Philadelphia. "It could be the solution to a problem; it could be getting a joke; or suddenly recognizing a face. It could be realizing that a friend of yours is not really a friend." Following the brain as it rises to a mental challenge, scientists are seeking their own insights into these light-bulb flashes of understanding, but they are as hard to define clinically as they are to study in a lab. These sudden insights, they found, are the culmination of an intense and complex series of brain states that require more neural resources than methodical reasoning. People who solve problems through insight generate different patterns of brain waves than those who solve problems analytically. "Your brain is really working quite hard before this moment of insight," says psychologist Mark Wheeler at the University of Pittsburgh. "There is a lot going on behind the scenes." Together, the two research teams reported that people who solved problems through insight had different brain wave patterns than people who don't. In PLoS Biology, they documented "Neural Activity When People Solve Verbal Problems with Insight" and the "Neural Basis of Solving Problems with Insight." At the University of London's Goldsmith College, researchers reported in the Journal of Cognitive Neuroscience that brain waves heralding an insight can be detected 8 seconds before we become conscious of it. In fact, our brain may be most actively engaged when our mind is wandering and we've actually lost track of our thoughts, a new brain-scanning study suggests. "Solving a problem with insight is fundamentally different from solving a problem analytically," Dr. Kounios says. "There really are different brain mechanisms involved." By most measures, we spend about a third of our time daydreaming, yet our brain is unusually active during these seemingly idle moments. Left to its own devices, our brain activates several areas associated with complex problem solving, which researchers had previously assumed were dormant during daydreams. Moreover, it appears to be the only time these areas work in unison. "People assumed that when your mind wandered it was empty," says cognitive neuroscientist Kalina Christoff at the University of British Columbia in Vancouver, who reported the findings last month in the Proceedings of the National Academy of Sciences. As measured by brain activity, however, "mind wandering is a much more active state than we ever imagined, much more active than during reasoning with a complex problem." She suspects that the flypaper of an unfocused mind may trap new ideas and unexpected associations more effectively than methodical reasoning. That may create the mental framework for new ideas. "You can see regions of these networks becoming active just prior to people arriving at an insight," she says. Taken together, these findings highlight a paradox of mental life. They remind us that much of our creative thought is the product of neurons and nerve chemistry outside our awareness and beyond our direct control. "We often assume that if we don't notice our thoughts they don't exist," says Dr. Christoff in Vancouver, "When we don't notice them is when we may be thinking most creatively."
Prior to May, according to TrimTabs Investment Research, the highest level of share issuance in a given month was $38 billion. May blew that record out of the water, with a monthly total of $64 billion. Furthermore, that blistering pace has continued during the first two weeks of June, according to TrimTabs. How bad an omen is this corporate eagerness to offer its shares to the investing public? Looking back through recent history, TrimTabs found that there have been just 12 months since 1998 in which total new corporate offerings totaled at least $30 billion. The average return for the S&P 500 index over the 90 days following those months was a loss of 4%. Dissecting the data further, TrimTabs next focused on those months in which not only did total corporate issuance exceed $30 billion, but also those in which total corporate share purchases were less. The S&P 500's average 90-day return following those months was a loss of 7%. This more-narrowly-defined subset applies to today, unfortunately. According to TrimTabs, corporate new offerings since the beginning of May have been nearly five times greater than corporate purchases. The recent surge in the supply of shares has also caught the attention of Ned Davis, the eponymous head of Ned Davis Research. He has found through his research that it is optimal not to focus on monthly totals but instead on a rolling 13-week window. On this basis, according to Davis, recent corporate issuance has been exceeded historically only by two other occasions -- early 2000 and early 2008. Those were "not great times to buy stocks," Davis notes dryly. Davis also draws an even more ominous parallel to the recent corporate rush to sell stock: "This high level of [recent] supply is one of the key characteristics of the monster rally in November 1929 - April 1930." From April 1930 through the low in July 1932, of course, the Dow Jones Industrial Average fell by 86%.
Based on historical standards, domestic stocks are certainly no longer a bargain, according to Ben Inker, director of asset allocation at GMO, the asset manager. "From a pure valuation perspective, we're in a bit of a gray zone now," Mr. Inker said. "Stocks aren't obviously overvalued, but we can't say they're cheap, either." Valuing equities is always hard, but it is particularly tricky amid an economic downturn of such historic proportions. There is little sense of when the fundamentals of the economy - including corporate profits - will recover. It's also uncertain how government stimulus efforts will ultimately affect crucial factors like inflation and interest rates, which have a direct impact on share prices. Traditionally, the price-to-earnings ratio has been the most commonly used measure for valuing the market. Yet there are several ways to calculate P/E's - and current economic circumstances make some methods particularly hard to apply. For example, a classic technique takes the current price level of the S&P500 and divides that by the earnings of the companies in the index over the preceding 12 months, using generally accepted accounting principles. Based on these figures, the S&P has had an average price-to-earnings ratio of 12.6 at the end of bear markets since 1938. But this is no ordinary downturn. Because corporate losses in Q4-08 equaled profits registered in the previous two quarters, the market's overall P/E, based on GAAP earnings, now stands at more than 100. That's pricey by any definition. Because profit growth can be so unreliable in a severe recession, some strategists prefer to gauge stock prices by using so-called operating earnings, which exclude one-time write-offs like the expenses associated with closing down a factory or a company division. Based on operating earnings, the P/E of the S&P500 is a much more palatable 22 today. But that's still considerably higher than the average of 19 for the past two decades. What's more, there are concerns about how quickly the market's P/E has grown. It's not uncommon for market valuations to rise in the latter stages of a recession, because stock prices tend to move in anticipation of a recovery. That means prices - or the "P" in the P/E ratio - often recover before earnings do. But they don't usually expand this fast. Ned Davis Research looked at market valuations after bear markets since 1929. The firm found that in the first three months after bear markets, the market's P/E tends to climb by about 10%. And the multiple has traditionally expanded 22% in the first six months after a major market downturn. But since March 9, when the recent rally began, the P/E of the S&P500 has jumped nearly 40%. Such a surge in P/E ratios may be warranted if the recession ends soon and profits recover quickly. While there are some signs that the worst of the recession may be behind us, few analysts expect profits to stage a major rebound. And, of course, it's still unclear whether the recession and the bear market have ended. Still, the stock market looks much less expensive by using other valuation methods. For example, instead of adding up all the earnings for S&P500 companies to arrive at a single P/E ratio for the broad market, Ned Davis Research assesses the individual P/E ratios for every stock in the index. Then it determines the median P/E for the whole group - in other words, it finds the midpoint, such that half of the stocks in the index have a higher P/E and half have a lower one. Based on this technique, the P/E of the S&P500 is now at 15.6. That's well above the reading of 12 in March, but still slightly below the market's historical median of 16.5. "We're not as cheap as we once were, but we're not yet back to normal," said Tim Hayes, chief investment strategist at Ned Davis. But even if that technique is the best to use, it still means that the mind-set on Wall Street has shifted. Instead of betting on stocks because of unbelievably cheap prices, many investors are counting on the economy to rebound strongly. In other words, instead of betting on the "P" in the P/E ratio, stock investors are banking on the "E." But at today's prices, says Mr. Inker at GMO, "You're not getting paid a ton for taking on risk."
Junk bonds -- debt issues of companies rated below investment grade -- have benefited from the same improved investor sentiment that has boosted the stock market: If the economy begins to recover in the second half, so should the finances of many now high-risk companies. But as with the rallies in the stock and commodity markets, the question is whether the junk rally has gone too far. "It's feeding on itself," said Kingman Penniman, head of KDP in Montpelier, Vt. In other words, the better the market does, the better it does, as money chases after it. That's great for "momentum" traders, but "for fundamental investors, it's murder," Penniman said. What gives him pause, he said, is that the riskiest junk bonds have rallied much more since early March than those of better quality. Even if you believe that the economy will get better in the second half, many financially challenged companies are too far gone to be saved, Penniman said. The credit outlook for those companies "is getting worse, not better," he said. Indeed, defaults on junk bonds continue to surge. A total of 25 U.S. companies defaulted on their bonds in May, bringing the year-to-date total to 101, according to Standard & Poor's. That left the trailing 12-month default rate at 8.25% of the junk bond universe. And S&P predicts much more to come: It is forecasting the 12-month default rate to reach 14.3% by April 2010. "It could reach as high as 18.5% if economic conditions are worse than expected," S&P warned in a report this week. Obviously, investors know that defaults are going higher. And a default on a bond you own doesn't necessarily mean you lost your entire investment. So a bet on a diversified portfolio of junk bonds is a bet that interest income from the companies that keep paying their debts will more than offset losses from defaults. The question is whether average junk yields now under 11% will be enough to compensate for the bombs that have yet to go off -- or whether it's smarter to wait for an inevitable market "correction" before putting more money into the junk bin.
Refinance activity at J.P. Morgan Chase is already "really down" since rates began rising, a spokesman says. A rate of 4.75% "seemed to be the switch" that turned on refinance activity, he says. Now, rates are a full percentage point higher. "Mortgage rates at these levels will hobble the [housing] recovery, and it was just the beginning of the recovery," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley. Higher mortgage rates are a blow to borrowers who were looking to refinance and reduce their monthly mortgage payments. Earlier this spring, mortgage rates had fallen below 5%, the lowest in 50 years, unleashing a wave of refinancing activity and spurring housing sales. By refinancing, borrowers on average have been able to reduce their mortgage rates by 1.3 to 1.5 percentage points, saving around $2,500 annually on a $200,000 loan, according to Freddie Mac.
Some market bulls say this ebb in the volatility numbers confirms that the rally that began in early March is real, because it shows that much of the anxiety that scared investors away from stocks appears to be dissipating. But don't assume that volatility is gone for good. History shows that rallies that emerge from the depths of bear markets are almost always followed by a "retesting" of those market lows. "We always tend to get a very sharp rally off a bear market low," said Sam Stovall, chief investment strategist for Standard & Poor's. "And like it or not, we tend to get a decline thereafter, as the market digests what it just gained." Sometimes, the retests can be mild. For example, after the recovery rally that took place at the end of the 1982 bear market, the S&P500 index fell about 4%. But retests can also be frightening. After stocks rallied in October 2002, the S&P500 suffered another scare that pushed stock prices lower by 15%. Mr. Stovall studied retests going back to 1957, and found that the average such event lowered stock prices about 7%. But those that followed "mega downturns" - like the one the market suffered over the last year or two - took down the S&P by 14%, on average. So let's assume that the rally that began in early March peaked on May 8, with the S&P500 at 929. A correction of 14% would bring down the index to 799. Based on its current level, the market would have to fall an additional 13% or so to reach that level. "If we're going to go through a retest that could be as severe as a correction - a 10% to 20% decline - I would tend to think that panic will return," Mr. Stovall said. Jeffrey N. Kleintop, chief market strategist at LPL Financial, agrees that volatility will stage a comeback. He said he expected another wave of selling to erase about half of the 36% gain that stocks have achieved since their March lows. That means that even though volatility tends to decline during the summer months, he said, "the next few months will see higher volatility than the past two to three months of relatively steady gains." To be sure, that volatility may not be as severe as it was when stocks were setting their bear market lows. For instance, when the 2000-02 bear market ended on Oct. 9, 2002, the VIX climbed as high as 42 before falling back into the low 20s. During the subsequent retest, the VIX climbed again, but never made it all the way back above 40. Still, there are plenty of reasons to believe that volatility will re-emerge soon. For starters, Mr. Kleintop said, there's the relative uncertainty still surrounding the economy. Both bulls and bears may overreact to economic reports in the coming weeks, giving stocks a bumpy few months, he said. Adding to the potential for stronger-than-expected volatility is the tremendous appetite for risk-taking that many investors showed in the first eight weeks after global markets started recovering in early March. During that period, investors put more new money to work in risky emerging-market stock funds - which invest in countries like China, India and Russia - than they invested in domestic stock funds, European portfolios and Japanese equity funds combined. So, if the global markets stumble, there's a good chance that investors' current courage will turn into another bout of fear, which will spill over into a drop in domestic stocks. Is the bear market really over? Watch the VIX.
Unfortunate though that may be, Wall Street's proprietary research has already come to more closely resemble that of the independents, and there is reason to believe that its overall quality will be sustained. That's because the greatest shift in Wall Street stock analysis since those changes appears to be a sharp decline in the number of buy recommendations, according to Brad M. Barber, finance professor at the University of California, Davis. The probable cause of this, he said, was the change that will remain in effect - the one mandating greater transparency in reporting, formally known as N.A.S.D. Rule 2711. In a study in the April 2006 issue of the Journal of Accounting & Economics, Professor Barber found that in the first year after N.A.S.D. 2711's adoption in 2002, the percentage of Wall Street recommendations in the buy category fell by one-third. Crucially, that was before regulators began making Wall Street firms provide independent research to clients. (Professor Barber was a co-author of this study, with Reuven Lehavy of the University of Michigan, Maureen F. McNichols of Stanford, and Brett Trueman of the University of California, Los Angeles.) The investigations into Wall Street practices found that stock analysts might have felt pressure from the investment banking and brokerage sides of their firms to have a buy-side bias that would please executives of the companies being analyzed. Professor Barber said the transparency rule, in itself, appeared to have cut down on this buy-side bias. By the time Wall Street firms began distributing independent research, he said, there was no significant difference between them and independents in their share of buy, hold and sell recommendations. Other than this shift, the overall quality of proprietary Wall Street research hasn't changed much in recent years, he said, although he said that there isn't enough data to yield more than a tentative conclusion. Before N.A.S.D. 2711, stocks receiving buy recommendations from Wall Street analysts didn't perform as well, on average, as the "buys" of independents. But when it came to sell recommendations, Wall Street analysts were more on target: stocks getting their sell signals performed worse, on average, that those with "sells" from independents. This isn't so surprising, Professor Barber said. Because buy signals were so common on Wall Street, the more discriminating independent analysts, on average, could be expected to fare better. But on the other side of the coin, Wall Street analysts were stingier with sell recommendations - and, sure enough, came out ahead. A separate, forthcoming study in the Review of Financial Studies has also found that the difference between Wall Street and independent stock research has largely disappeared. (It was conducted by Ohad Kadan of Washington University of St. Louis; Leonardo Madureira of Case Western Reserve; Rong Wang of Singapore Management University and Tazchi Zach of Ohio State.) Professor Barber offered another factor to consider in interpreting a Wall Street analyst's research report: the buy, hold, and sell recommendations may be less valuable than supporting data and analysis. And when measured along other dimensions, Wall Street analysts often compare favorably with independents. For example, he says, a number of studies have found that Wall Street analysts' earnings forecasts are more accurate, on average. The bottom line is this: It's doubtful that investors will be worse off come July, when the regulatory arrangement expires, especially if they look beyond specific buy-hold-sell advice and focus on the underlying data and analysis.
We've just gone through a period where many of us believed that we could get great financial rewards with low risk. Now we see that wasn't true - that, in fact, there was a great deal of risk. But now we've gone to the other extreme, seeing danger everywhere, without taking the time to rationally assess the reality. We worry about our plunging retirement accounts when we're far from retirement. We fret about declining house prices when we have no intention of selling. How do we analyze risks, and why are we sometimes so bad at it? "We're not generally taught well how to think about risks," said Kimberly M. Thompson, adjunct associate professor for risk analysis and decision science at the Harvard School of Public Health. "We're not taught how to cope with uncertainty. We tend to want answers to be in black and white without a whole lot of gray." It turns out that the way many of us perceive and cope with risks has little to do with the actual statistical probability of that particular danger affecting us. "The major ways most of us deal with risk is not through analytical calculations, but through gut instinct," said Paul Slovic, president of the nonprofit research company Decision Research and a professor of psychology at the University of Oregon. Professor Thompson and others talk about "cognitive heuristics" - or mental rules of thumb that we use in grappling with risk. Specialists in the field have found that certain factors make people perceive things as risky even if they really aren't - and other factors let us ignore real dangers. One issue is how much information is available. If the story is all over the news media - a terrorist attack, a campus shooting - then people believe the risk is high even if the probability of such a catastrophe affecting them is actually very low, Professor Thompson said. Another factor is whether the risk is assumed or imposed. If you take on the risk voluntarily, you tend to perceive it as much less dangerous, said William K. Hallman, a professor in the Department of Human Ecology at Rutgers University. For example, he said, one of the reasons that smoking became unacceptable was because of concerns about secondhand smoke - a threat that is forced on people rather than one to which they choose to expose themselves. We also lump together risks and benefits. Although in the financial world, it is common wisdom that the riskier the investment, the greater the potential compensation, in everyday life we tend to view things differently. If we see great benefits in what we're doing, like driving a car, we tend to view the risks as low, even though car crashes are the No. 1 cause of injury deaths in the United States. Then there is the way we look at bad luck and disasters. We tend to believe that while terrible things do happen, they happen to other people - and largely to those who deserve them. If it makes you feel any better, financial experts can be just as susceptible to this kind of distorted perception as the rest of us. In her studies of economic collapses around the world and throughout history, Carmen M. Reinhart, a professor of economics at the University of Maryland, says that the experts have consistently believed that what happened in other countries or at other times won't occur again. "The same patterns emerge, but people don't think the old rules apply to them," said Professor Reinhart, co-author of a new book, "This Time It's Different: Eight Centuries of Financial Folly" (Princeton University Press). "When the Mexican crisis occurred, the Asians said, ‘That will happen in Mexico, it won't happen here.' Then when the Asian meltdown happened, the perception here was, ‘That's happening in emerging countries.' " Each time, she says, people believe that because of new technology or policy, "the old rules of valuation don't apply." Around the world, she added, "People will tell you why this time it's different - why the bubble isn't a bubble." Until it bursts. The rest of us often depend on what the experts tell us - and the more we trust their advice, the more willing we are to take on risk. But part of the problem is that we don't receive particularly good information to help us assess risks and, therefore, "are left to go on guesswork," said Baruch Fischhoff, a professor of decision science at Carnegie Mellon University. "If people are given good, straightforward information, they make pretty good decisions, but it's hard to get that information." Although government agencies and companies sometimes make no effort to present lucid and concise data to consumers, all too often those responsible for communicating information really want to be clear, but fail, said Professor Fischhoff, who leads the Risk Communication Advisory Committee for the Food and Drug Administration. They just don't do their homework on how to communicate risks to consumers in an understandable way, he said. If government disseminated information "in a convenient, authoritative, comprehensible way, then it could win the market's share of people's trust," he said. There are ways we can try to look at the reality behind the risk. Professor Thompson suggests 10 questions to ask to start figuring out the relative dangers and benefits of an issue (the full list appears on www.health-insight.harvard.edu). Although the questions were written with health concerns in mind, they can be applied to other areas, she said. The questions include these: What is the message? Does it affect a large number of people or a small number? Are there alternative ways to look at the message? What is the source of the information; is it reliable? What do the numbers mean? What actions can be taken to reduce the risk? Recently, I had a quick reality check about risk perception. Because my husband is between jobs, I figured we could save some money if we eventually let our health insurance lapse for a week or two. What are the odds of something happening? But then, this week, I badly sprained my ankle while playing tennis, leading to a trip to the emergency room. Thankfully, we have health insurance. If not, we could be facing a bill of thousands of dollars. The lesson I learned is that the risk of going without health insurance isn't worth the potential cost. And that tennis can be dangerous.
First up is the LIBOR rate. This is the interest rate banks charge each other for one-month, three-month, six-month and one-year loans. LIBOR is an acronym for "London InterBank Offered Rate" and is the rate charged by London banks. This rate is then published and used as the benchmark for bank rates around the world. Interbank lending rates - the three-month dollar, euro and sterling LIBOR rates - declined to record lows last week, indicating the easing of strain in the financial system. After having peaked at 4.82% on October 10, the three-month dollar LIBOR rate declined to 0.83% on Friday. LIBOR is therefore trading at 58 basis points above the upper band of the Fed's target range - a substantial improvement, but still high compared to an average of 12 basis points in the year before the start of the credit crisis in August 2007. Importantly, US three-month Treasury Bills have edged up after momentarily trading in negative territory in December as nervous investors "warehoused" their money while receiving no return. The fact that some safe-haven money has started coming out of the Treasury market is a good sign. The TED spread (i.e. three-month dollar LIBOR less three-month Treasury Bills) is a measure of perceived credit risk in the economy. This is because T-bills are considered risk-free while LIBOR reflects the credit risk of lending to commercial banks. An increase in the TED spread is a sign that lenders believe the risk of default on interbank loans (also known as counterparty risk) is increasing. On the other hand, when the risk of bank defaults is considered to be decreasing, the TED spread narrows. Since the peak of the TED spread at 4.65% on October 10, the measure has eased to an 11-month low of 0.67% - still above the 38-point spread it averaged in the 12 months prior to the start of the crisis, but nevertheless a strong move in the right direction. The difference between the LIBOR rate and the overnight index swap (OIS) rate is another measure of credit market stress. When the LIBOR-OIS spread increases, it indicates that banks believe the other banks they are lending to have a higher risk of defaulting on the loans, so they charge a higher interest rate to offset that risk. The opposite applies to a narrowing LIBOR-OIS spread. Similar to the TED spread, the narrowing in the LIBOR-OIS spread since October is also a move in the right direction. The Fed's Senior Loan Officer Opinion Survey of early May serves as an important barometer of confidence levels in credit markets. Asha Bangalore (Northern Trust) said: "The number of loan officers reporting a tightening of underwriting standards for commercial and industrial loans in the April survey was significantly smaller for large firms (39.6% versus peak of 83.6% in the fourth quarter) and small firms (42.3% versus peak of 74.5% in the fourth quarter) compared with the February survey and the peak readings of the fourth quarter of 2008." "In the household sector, the demand for prime mortgage loans posted a jump, while that of non-traditional mortgages was less weak in the latest survey compared with the February survey. At the same time, mortgage underwriting standards were tighter for both prime and non-traditional mortgages in the April survey compared with the February survey," said Bangalore. In other words, more needs to be done by the lending institutions to revive mortgage lending. The spreads between 10-year Fannie Mae and other Government-sponsored Enterprise (GSE) bonds and 10-year US Treasury Notes have compressed significantly since the highs in November. In the case of Fannie Mae, the spread plunged from 175 to 26 basis points at the beginning of May, but have since kicked up to 38 basis points on the back of the rise in Treasury yields. Junk bond yields have also declined, as shown by the Merrill Lynch US High Yield Index. The Index dropped by 40.8% to 1,291 from its record high of 2,182 on December 15. This means the spread between high-yield debt and comparable US Treasuries was 1,291 basis points by the close of business on Friday. With the US 10-year Treasury Note yield at 3.13%, high-yield borrowers have to pay 16.04% per year to borrow money for a 10-year period. At these rates it remains practically impossible for companies with a less-than-perfect credit status to conduct business profitably. In summary, the past few months have seen impressive progress on the credit front, with a number of spreads having declined substantially since their "panic peaks". The TED spread (down to 0.67% from 4.65% on October 10), LIBOR-OIS spread (down to 0.63%% from 3.64% on October 10) and GSE mortgage spreads have all narrowed considerably since the record highs. In addition, corporate bonds have seen a strong improvement, although high-yield spreads remain at elevated levels. Credit derivative indices for companies in all the major geographical regions have also shown a marked tightening since the November highs. Most indications are that the credit market tide has turned the corner on the back of the massive reflation efforts orchestrated by central banks worldwide and that the credit system has started thawing. However, although the convalescence process seems to be well on track, it still has a way to go before confidence in the world's financial system is restored and liquidity starts to move freely again.
But by another definition, we may still be in a bear market - a long-term decline, extending over many years, often called a "secular bear market." The current rally could turn out to be short - making it "a cyclical bull market" nestled inside a secular bear market. That would not be cause for much celebration. It would mean that stocks might be stuck at current levels or even resume their downward spiral. Liz Ann Sonders, chief investment strategist at Charles Schwab, says she is inclined to take this view. While she thinks that the cyclical bear market that began in 2007 is over, she said, "I'm still slightly leaning toward thinking that we are still in a secular bear." We've been there before. In the period from 1966 to 1982, the S&P500 was widely regarded as a secular bear market. That was followed by a secular bull market from 1982 to 1999, when stocks had a spectacular run-up. But stocks fell into yet another secular bear nine years ago - shortly after the tech-stock bubble burst in 2000. Despite some rallies, the S.& P. has fallen about 44% during this time. So how should we classify the recent rally? It could be the start of a secular bull market, of course, but it's hard to say with certainty, because a new secular bull would require not only rising stock prices, but also new all-time inflation-adjusted highs in major stock indexes. That means the S&P500 would have to climb to at least 1,890, which represents its March 2000 peak of 1,527, adjusted for inflation. With the S&P500 now at 882.88, the market would have to soar an additional 114 percent - on top of the 31 percent it has already climbed over the last two months. Such a surge could be quite a challenge. Robert D. Arnott, chairman of the investment consulting firm Research Affiliates, in Pasadena, Calif., is skeptical about the possibility of that happening anytime soon. "I don't see any way that a new bull could reach new highs, adjusted for inflation, relative to the market's 2000 peak," he said. He added that secular bull and bear markets have historically lasted 15 to 25 years. "That would indicate we're still perhaps a decade away" from the end of the secular bear, he said. Ms. Sonders of Schwab said there were several economic obstacles to reaching new market highs in the near future, including the potential for strong inflation after the flood of liquidity that central banks have pumped into the global economy. If this rally turns out to be merely the start of a cyclical bull market, not a secular one, the implications for investors are gloomy. Jeffrey A. Hirsch, editor in chief of the Stock Trader's Almanac, studied both types of bulls and bears. He found that since World War II, cyclical bull markets born inside secular bears returned about 42%, on average, for the entire life of the rally. That's less than half the gains generated by cyclical bulls that formed within secular bull markets. What's more, it's not that much higher than the 31% that the S&P500 has returned since March 9. Moreover, the average cyclical bull market within a secular bear has lasted 157 days, while cyclical bulls within secular bull markets have endured 342 days, on average. A modest recovery is exactly what many market strategists are bracing for - not only for stock prices, but also for the economy in general. Jack A. Ablin, chief investment officer at Harris Private Bank in Chicago, says that while the economy is likely to rebound toward year-end, the recovery will be "very slow and incremental as we need to repair 10 years of overspending and overborrowing." Real gross domestic product - economic activity adjusted for inflation - has the potential to grow at around 3% a year, Mr. Ablin said. "But I think we're going to grow below potential for several years." Duncan W. Richardson, chief equity investment officer at Eaton Vance, the asset manager in Boston, agrees. "We could be in store for a couple of years of below-trend growth," he said. But that "may not be such a bad thing," he added. Faster growth than that, he said, might fuel fears of inflation and cause the Federal Reserve to raise interest rates sooner rather than later. Stocks may face a somewhat similar pattern. Jeremy Grantham, chairman of GMO, the investment management firm, said stocks "will kick up much more impressively than the economy" in the initial stages of the recovery. But he added that the market "could then move sideways for a very long time."
Instead, investors have been focusing on positive surprises among first-quarter corporate earnings and on the silver linings of the bad news, such as stronger-than-expected consumer-spending data within the GDP report and a steep draw-down of inventories that raised hopes for a quick snap-back in production once the economy stabilizes. "The bottom line is that yes, the economy continues to deteriorate, but the data is beginning to show that the bottom may be sooner than thought and that's translating into a shift in psychology," says Peter Scholtz, president of Scholtz. To some degree, the recent resiliency of stock prices reflects the fact that while many shorter-term players such as hedge funds are negative about the immediate prospects for the market, longer-term investors such as mutual funds or pension funds have become more comfortable with the outlook for the next several years. Those big investors had significantly scaled back their stock holdings over the last six months. Now, even if they're not wildly bullish and even think stocks could yet retest their lows, many longer-term investors have stopped defensive selling. Instead they're inching back into stocks amid a sense that governments around the world have been successful in containing the financial crisis. "What's happening is portfolio managers are saying, 'gee, that's a positive, let me increase my [stock] exposure incrementally and that incremental shift is pushing the market higher," says Mr. Scholtz. For his part, Mr. Scholtz has been wrestling with whether its time to shift clients out of a defensive posture. "More and more we think we shouldn't wait." The Dow Jones Industrial Average closed Friday at 8212.41, up 1.7% for the week. The index is up 25% from the 12-year low it hit on March 9. The Standard & Poor's 500-stock index rose 1.3% for the week. Supporting the notion that investors are less fearful of another big down-leg in stocks has been the recent decline in the Chicago Board Options Exchange's volatility index, or VIX. The VIX uses options prices to measure market expectations of how much the S&P 500 is likely to move up or down over the next 30 days. During periods of turmoil, options prices tend to rise, which lifts the VIX. The VIX hit all-time highs during the heat of last fall's financial crisis as it surged above a reading of 80. That compared to low-teen levels common during the middle of this decade. Even as the stock market began to recover in mid-March, the VIX stayed stubbornly above 40, suggesting investors weren't convinced the worst was really over. But the VIX finally broke lower two weeks ago and finished last week at 35.3. By historical standards, that level would still point to acute fears about the future, but analysts say the move was a positive sign. Sivan Mahadevan, head of equity and credit-derivative research at Morgan Stanley, says that a closer reading of options prices reinforces the idea that investors are less worried. Back in November, options prices suggested a 17% chance that the S&P 500 would fall 50% over the next 12 months, Mr. Mahadevan says. Late last week, that probability was 8%. However, Mr. Mahadevan says options prices don't suggest investors see a meaningfully higher probability of a huge rally. Another recent trend has been a move toward more normal relationships between longer- and shorter-term expectations for volatility. In normal times, options prices reflect greater certainty about near-term stock movements than for developments further in the future. But during the crisis, investors showed greater fear about the risks for stocks in coming weeks, than, say, about what might happen 6 months or a year down the road. Carl Mason, equity-derivative strategist at BNP Paribas, says investors have been pushing back the time horizon over which they are most concerned about stocks. "Instead of fearing the here and now, investors seem more concerned about year end," Mr. Mason wrote in a report published Friday morning. Giving some comfort has been first-quarter corporate earnings. With 65% of the companies in the S&P 500 having reported, operating earnings appear on track to show a slightly smaller-than-expected 35.1% decline, according to Thomson Reuters. According to Morgan Stanley, 65% of companies have beaten estimates, compared with the 62% average over the past decade. Some say caution is still warranted. Andrew Lapthorne, global quantitative strategist at Société Générale, says that while only 30% of S&P 500 companies have failed to top earnings-per-share forecasts, 62% fell short on sales. In addition, he notes that analysts continue to reduce earnings forecasts for future quarters. For example, second-quarter forecasts now call for a 34.6% drop in operating earnings, compared with the 33.7% decline expected a week ago. Mr. Lapthorne says investors taking heart from the current earnings news also run the risk of being fooled by a seasonal tendency for April and May to be the "least bad" months for earnings downgrades. In addition, "downgrades tend to intensify as the year goes on even during periods of economic growth," he wrote Friday. Still, Mr. Scholtz says, first-quarter earnings suggest investors could be justified in having a more optimistic view of the ability for corporate profits to rebound from the downturn. Even if the economy continues to struggle, the balance sheets of U.S. corporations are in relatively good shape and many companies have aggressively cut costs. As a result, he says, "incremental sales can go straight to the bottom line...and the ability for earnings to recover is fast."
Companies that have managed to increase their payouts in this tough economic climate may be a good target for a time-tested conservative investment strategy: buying shares of solid dividend-payers. Over the long run, this approach has outperformed the stock market. Since the end of 1979, investing in dividend-paying stocks in the S&P500 would have earned you 11.6% a year, on average, on a total return basis, versus 10.5% for the overall index. And the ability to sustain dividends is often regarded as a sign of a solid company, even in the current environment. "Dividends are a wonderful gauge for management's confidence in forward-looking profitability," said Robert D. Arnott, chairman of Research Affiliates. That's because raising dividends is not an automatic decision. "It takes a conscious, deliberate act," he said. Jeffrey N. Kleintop, chief market strategist at LPL Financial, pointed out that recent dividend increases haven't been concentrated only in defensive areas of the market, like health care and utilities, where one would expect generous payouts under any market conditions. Many of the increases, in fact, have come from economically sensitive areas, like the consumer discretionary, industrial and technology sectors. Among the companies that have recently raised or started payments are Coach, Qualcomm, and Norfolk Southern, the railroad transportation company. "I like the fact that it's showing up in cyclical sectors," said Mr. Kleintop, adding that this could be a sign that the economy might not be in as bad a shape as investors assumed earlier this year - or that corporate executives were starting to see enough hopeful signs for a future recovery that they were willing to part with cash. At the very least, the positive ratio of dividend increases to cuts shows that "there are pockets of the economy that are actually weathering this mess surprisingly well," Mr. Arnott said. Still, the statistics on dividends hardly suggest that the overall economy is strong. Dividend increases usually outnumber cuts in the S&P500, partly because, under normal economic conditions, only a handful of companies have to resort to pulling the plug on their payouts. In 2007, there were only 12 decreases to 298 increases. Even last year - a terrible one for the financial sector, which once supplied a huge percentage of corporate dividends - there were 62 cuts to 241 increases. So this year's tally of 70 increases to 59 decreases looks pale by comparison. What's more, when translated into dollars, the dividend cuts this year have swamped the increases, because many companies that lowered their payments eliminated them altogether. So far this year, the 70 dividend increases raised payouts by $5.1 billion, while the 59 cuts reduced payments by $45.1 billion, according to Howard Silverblatt, senior index analyst for S.& P. "The decreases are geometric in scale, while the increases are significantly less dramatic," Mr. Silverblatt said. But Mr. Arnott said that this was to be expected. "When you're cutting dividends, you don't want to trickle out the bad news - you want to get it out there and get it done," he said. On the other hand, "when you're raising dividends, you want to be cautious, because you want to leave yourself some operating cushion in case you're wrong," he said. "And you want to leave yourself room for future additional hikes." The real test is to come: Will the trend continue into the next quarter - and will companies that raised their cash payments avoid having to reverse course if liquidity issues resurface? Mr. Silverblatt cautions that the dividend outlook remains decidedly mixed. For example, he says it's worrisome that not even halfway into the year, the number of dividend cuts among S&P500 companies rivals the 2008 total of 62. And on a dollar basis, the $45.1 billion in payment reductions just among companies that cut their dividends has already set a record for a full calendar year. This makes dividend investing tricky. Market strategists suggest spreading one's dividend bets across the broad market, rather than concentrating on just a handful of sectors. Consider the experience of investors who recently focused their bets on dividend-paying financial stocks. At their peak in 2007, financial stocks accounted for around a third of all the dividend payments in the S&P500. But as the sector plummeted in the global financial meltdown, the dividends didn't cushion the blow. Instead, financial stock prices and dividend payments sank in unison. Today, financial stocks generate less than 10% of total S&P500 dividends. In addition to seeking greater diversification, investors might look to stocks that have consistently managed to raise their dividends over several years, rather than just gravitating toward stocks with the biggest cash payments. That's partly because companies that have the financial wherewithal to consistently raise dividends are likely to have strong cash flows and balance sheets. And the market often favors such companies. For example, Mr. Kleintop has found that the shares of companies that have increased their dividends this year were up 0.3%, on average, so far in 2009. By comparison, the shares of companies that cut their payments this year were off by 12.9%.
There are a slew of free online sites people can use to organize their personal finances. A new one, SimpliFi.net, focuses on having people create a road map to save for short- and long-term goals. MarketWatch's Jonathan Burton reports. Current worries have produced lower expectations, increased savings and the unlikely emotional feel-good power of "smart shopping" and being thrifty, if only because those solutions are easier and more realistic than trying to play a fast game of catch-up. The "Survey of Affluence and Wealth in America," set to be released Wednesday by American Express Publishing and Harrison Group, will show that 53% of the nation's wealthy are now worried that they could run out of money, in large measure because many of the respondents fear the country is headed for an economic depression. Meanwhile, the 10th annual Phoenix Wealth Survey released Monday showed that America's millionaires have been stripped of their confidence and sense of security. The survey, conducted by The Phoenix Cos., which sell insurance and annuities to high-net-worth consumers, showed that roughly one in four people felt their wealth was "extremely" or "very secure" for the long term; nearly half of the surveyed millionaires felt their wealth was safe as recently as two years ago. "People who are focused on wealth -- who spend much of their time worrying about making it and how they can better their future financially -- have a greater chance of attaining wealth, but they also feel the pain of loss more acutely," said John Nofsinger, a Washington State University professor who studies behavioral finance and investor psychology. "They're better off after this loss of wealth than most people, but emotionally they are hurting more than people with less wealth but different priorities." Added Meir Statman, a professor at Santa Clara (Calif.) University: "This economy is playing mind games with people's aspirations. If you benchmark yourself against the richest man in town -- and that is frequently what wealthy people do -- you are going to feel mighty poor in the best of conditions. ... Yes, the market is bad, but a lot of wealthy people are making themselves miserable when their finances have merely taken a blow, not some fatal beating." In short, don't cry for millionaires. But rich or poor, there appears to be a phenomenon at work here that is as much psychological as it is about cash. Clearly, investors personalize losses more than gains. But for investors who have reached their financial goals, setbacks represent the destruction of a dream. For a person who believes that a certain amount of net worth -- whether it is $200,000 or $10 million -- makes them set for life, seeing their portfolio shrink is like watching their dreams die. The financial world is full of stories of ordinary folks who amassed enough money to be set for life -- even with a market downturn -- but who then lived as if they had nothing. If $1 million was the goal, for example, $850,000 suddenly feels like failure, even if it means little or no change in standard of living. "Among wealthy families, 80% feel like they have had substantial hits to their financial security and 88% have become more resourceful in terms of making financial decisions," said Jim Taylor, vice chairman of Harrison Group, a Connecticut-based research-consulting firm. "The savings rate for these families has gone through the roof, up to 12%." "The irony is that despite the worries and the cutbacks and having to be more resourceful or spend less to make their money go further, the percentage of families reporting themselves to be very happy is up," Taylor added. "Two-thirds of the families say they are very happy, which is up since 2007." Taylor believes that represents a turn toward optimism. Tuesday's consumer confidence numbers generally showed a big step up in confidence, although the overall numbers remained in negative territory. Will we revert? And if spending less, being a smart shopper and saving more are helping to raise the self-esteem of the wealthy, there's at least a chance that these changes will be permanent, that old spendthrift habits will not return even if the market continues to rebound. This is where behavioral finance experts disagree. Most believe that current economic woes have been enough to make people take temporary measures, with the hope that happy days will return, allowing the investing public to go back to its old habits. Some, like Taylor, think the new habits feel good enough that they will live beyond this recession. "The permanence of these lifestyle changes is up for grabs," said Donald MacGregor of MacGregor-Bates, an Oregon-based firm that studies consumer and investor behavior. "The easy thing is to change habits now but to assume this is an aberrant situation and things will get better in the near future, near being the next year. And if things get better, rich or poor will probably go back to what they were doing a few years ago." "But we may also be looking at a different economic way of life," MacGregor added. "So people are right to be worried, but their anxiety isn't really doing anything other than making them lose sleep. ... If you can take your anxiety and turn it into productive worry and make your situation better -- if you can solve this problem in the best way for yourself, by changing spending or savings habits -- the one thing you can be sure of is that you will be better off no matter when the economy comes around." Related: Wealthy Investors Paralyzed by Markets, Barclays Says Giles & Hall, Bloomberg 6-15 Rich investors are paralyzed because they are concerned markets may decline further, said Philippe Sednaoui, chief executive officer of Barclays Wealth in Switzerland. More than two-thirds of 2,100 people surveyed worldwide [U.K., Monaco and Switzerland] said the risks of price fluctuations were still too high, even though almost 90% believe there were ways to make money in the current market, according to a report published today by the private banking unit of London-based Barclays Plc. "The vast majority of clients recognize that by historical standards there are great opportunities out there," Sednaoui said in an interview at his Geneva office. "But they have difficulty deciding whether a new storm will unleash, so aren't willing to act." The world's wealthy, defined as people with more than $1 million invested, probably saw their assets decline by at least one fifth last year, according to Scorpio Partnership, a London-based consulting firm specialized in wealth management. The S&P500 Index has climbed 40% since early March, paring losses for the past 12 months to 29%. The Barclays survey targeted people with 500,000 pounds ($830,000) TO 30 million pounds to invest and was conducted by the Economist Intelligence Unit between March and May. "The length and the strength of the rally has been surprising," Sednaoui said. "Eventually we'll see a correction. The question is whether it'll be more fundamental than technical."
How can this be? Three factors have obscured this truth from investors: deflation, dividends and the distinction between the Dow Jones industrial average and the overall stock market. Let's consider them one by one: Deflation: The numbers show that from a peak, on a closing basis, of 381.17 on Sept. 3, 1929, the Dow needed until Nov. 23, 1954, to return to its old high. But that's in "nominal" terms, without adjusting for the effects of inflation or its opposite, deflation. The Great Depression was a deflationary period. And because the Consumer Price Index in late 1936 was more than 18% lower than it was in the fall of 1929, stating market returns without accounting for deflation exaggerates the decline. Dividends: These payouts played a big role in the 1930s. When the Dow hit a low of 41.22 on July 8, 1932, for example, the dividend yield of the overall stock market was close to 14 percent, according to data compiled by Robert J. Shiller, the Yale economics professor. So ignoring dividends, especially when yields were so rich, also exaggerates the losses of a typical equity investor. The Dow VS. the Market: Many researchers consider the overall market - defined as the combined value of all publicly traded stocks - as the best gauge of a typical investor's experience. The Dow is made up of just 30 stocks, which are weighted in the index according to their price rather than their relative market capitalization. Perhaps the most celebrated illustration of the Dow's failure to represent the overall market traces back to a 1939 decision to delete International Business Machines from the Dow 30 list. I.B.M. wasn't restored to the index until 1979. Norman Fosback, editor of Fosback's Fund Forecaster newsletter, has estimated that the Dow would have been more than twice as high in 1979 had I.B.M. stayed in the index continuously. It's unclear when the Dow would have returned to its 1929 pre-crash high had I.B.M. not been deleted in 1939. In response to a request, an analyst at the indexes division of Dow Jones said that it was unable to determine the answer. But because I.B.M.'s stock was one of the best performers during the 1940s, greatly outpacing the Dow itself, it's certain that its inclusion would have markedly accelerated the index's recovery. So when did the overall stock market really make it back to its pre-crash peak? Just four years and five months after its mid-1932 low, according to data provided to Sunday Business by Ibbotson Associates, a division of Morningstar. That seems remarkably fast, given that the stock market lost more than 80% of its value from its 1929 high to its mid-1932 low. But the quick recovery of the 1930s is consistent with the typical experience after other bear markets in the United States. Determining the precise length of such recoveries is a problem, given the many definitions of a bear market. Whatever definition is used, however, the typical recovery time is quite quick. According to a Hulbert Financial Digest study of down markets since 1900, the average recovery time is just over two years, when factors like inflation and dividends are taken into account. The longest was the recovery from the December 1974 low; it took more than eight years for the market to return to its previous peak, which was reached in late 1972. None of this, of course, guarantees that stocks will have a quick recovery from the market decline that began in October 2007. But it suggests that the historical record isn't as bleak as it looks.
Even the savviest investors could have difficulty maneuvering in such an environment. Already, hedge funds that specialize in distressed debt lost an average of 27% last year, and high-yield - or so-called "junk" - bonds are likely to exert greater challenges for investors in the months ahead. "You hear yields are attractive," Altman told professionals who manage investments for wealthy people at a recent CFA Institute conference in Chicago. "Well, good luck to you. You'll do well if there are not too many defaults. But we are predicting double digits. Then, you could have a problem." He thinks a 12.3% default rate among high-yield bonds is likely this year, and he would not be surprised by 15.4% or even 18.3%. With yields far above Treasurys, the market is telling investors that an 18.3% default rate is likely, Altman said. Last year, the high-yield default rate was only about 4.6%. But that should not comfort investors. Typically, defaults are the highest late in recessions. When there is a high level of defaults, bondholders should expect a low level of recoveries. This year, Altman thinks investors will receive an average of only about 25 cents on the dollar, and perhaps closer to 21 cents if his most dire projections come true. So investors who put money into high-yield bonds should expect to go through declines before finally experiencing gains. The current environment is not for the faint of heart. Some economists are predicting a different type of economic recovery than is typical. Rather than hitting a bottom, and then continuing upward, they are predicting a couple of years of rolling recessions - or moving in and out of recessions. If that's the case, Altman said it is not as likely that the big burst of returns will come. Rather, defaults could stay elevated without sharp relief. In such an environment, investors would be taking tremendous chances investing in individual high-yield bonds, or those called "noninvestment-grade" bonds. Even safer investment-grade bonds could pose a risk if their default rate reaches high levels. Consequently, Warren Pierson, senior portfolio manager for the Baird Intermediate Bond Fund, said he is avoiding high-yield bonds entirely in the fund. He sees no need to take the risks. Given worries about risks in the market, he said, he can invest in high-quality bonds and earn about an 8% return - close to the 9.4% historical average in the stock market. The opportunities appear so great, he said, he has been adding corporate bonds to the portfolio so they now make up about 40%, versus 30% previously, with the rest in a variety of government bonds.
For starters, the perception of risk in the market must decline significantly, market strategists say. By some measures, the stock market this year has been even more volatile - and frightening - than it was at the end of 2008. Consider that on 32 of the 73 trading days so far this year, the S&P500 has moved by 2% or more in either direction. "This has been an extremely emotional market," said James Stack, editor of newsletter InvesTech Market Analyst. "We need to see some of that volatility subside" before a sustained rally can ignite. The good news is that it's already starting to happen. Even as stock prices have soared of late, the Chicago Board Options Exchange Volatility Index (VIX), the popular gauge of market anxiety, has dropped drastically - to a reading in the mid-30s, compared with about 52 in early March. In fact, the VIX is now trading below its 200-day moving average for the first time since last September. This is important, some market watchers say, because it shows newfound investor confidence. Still, this rally now has to run a gantlet of tests regarding the second crucial factor: corporate profits. For the rally to be sustainable, earnings must justify the market's growing optimism. After all, when investors buy stocks, they are buying a share of corporate profit growth, too. Yet the short-term forecasts for first-quarter profits are pretty bleak. The consensus among Wall Street analysts is that earnings for companies in the S&P500 will drop 37% in the first quarter, versus the period a year ago, according to a survey by Thomson Reuters. If first-quarter results come in worse than that, the rally could easily be snuffed out, market watchers say. But noting that the expected decline is already so steep, Jack Ablin, chief investment officer at Harris Private Bank, said that "we have a pretty low bar to hurdle." And that bar may be even easier to clear if recent trade figures are accurate, said James W. Paulsen, chief investment strategist at Wells Capital Management. Mr. Paulsen noted that a recent Commerce Department report showed that exports unexpectedly grew by about $2 billion in February, to $126.8 billion. That better-than-expected news, he said, could mean that economists will soon begin revising estimates for first-quarter gross domestic product slightly higher. And if that happens, expectations for first-quarter earnings could move higher as well. "The earnings reports could still be bad, but it might not be nearly as bad as people thought just a few weeks ago," Mr. Paulsen said. A case in point: When Wells Fargo recently reported better-than-expected earnings for the first quarter, the Dow Jones industrial average soared nearly 250 points in a single day. An even bigger obstacle for this rally is the earnings outlook for the rest of the year. Remember that earnings are a lagging indicator. Since World War II, stocks have generally started recovering from bear-market lows some eight months before corporate profits stopped falling, according to Sam Stovall, chief investment strategist at S.& P. Now, most analysts are predicting that profits will continue to slide in the first three quarters of this year, but that they will recover sometime in the final three months. According to Thomson Reuters, Wall Street analysts now think that S&P500 profits will jump 168% in the fourth quarter, compared with the same quarter of 2008. Yet this probably isn't realistic. For one thing, that kind of earnings growth would be fueled partly by what analysts predict will be a stunning 707% climb in earnings among companies in the consumer discretionary sector, which includes automakers. Moreover, history shows that it may take awhile before profits make such a comeback. Mr. Stack of InvesTech has studied past recessions, and has found that since the Great Depression, it has typically taken nearly five months after the end of recessions for corporate profits to record their first quarterly gains. Based on this measure, an expected recovery in profits by October would assume that the recession will end next month. Yet few economists are predicting such a rapid recovery. S.& P., for example, is expecting the domestic economy to emerge from recession in the fourth quarter this year. So if this rally is to become a sustainable bull market, investors will not only need to see decent first-quarter results in the coming weeks, but they will also need to hear from companies that the profit outlook for the coming quarters has improved drastically.
This reversal of fortunes between 2002 and 2003 could have been expected, according to Russ Wermers, a finance professor at the Smith School of Business as the University of Maryland. In an interview, he said that the funds that lost the most during market declines tended to be quite risky. Of course, this risk tends to work against them during declines - but often bolsters their performance when the market rises. This is part of the reason that a new bull market causes fund rankings to be turned upside down. In his research, Professor Wermers has found that another big part of the explanation is the changing fortunes of various stock sectors as the market's overall trend shifts. Funds that bet on a sector that did well in a market downturn tend to do poorly when the market rises, he said. His findings help to explain why Morningstar's star-rating system has great difficulty in the early stages of a new bull market. The firm bases its star rating for a given fund on how it compares with others having a similar investment style. Consider two hypothetical portfolios of mutual funds constructed according to their Morningstar ratings at the end of the 2000-02 bear market. The first contained all domestic equity funds that, at that time, had a one-star rating (Morningstar's lowest); the second contained all those with a five-star rating (the highest). In 2003, the first portfolio produced a return almost five percentage points higher than the second, according to an analysis that Morningstar conducted for Sunday Business. That's the opposite of what an investor might have expected by using Morningstar's ratings to pick funds at the beginning of that bull market. These reversals stand out because they are the exception to the rule. So long as stock market's major trend is not in transition, Professor Wermers has found, there is a modest amount of persistence in funds' year-to-year rankings. Similarly, Russel Kinnel, Morningstar's director of fund research, reports that since 2002, when Morningstar adopted its current fund rating method, the average five-star fund has outperformed the average one-star fund over the year after the funds received their ratings. The investment implication of these results depends on whether you choose funds on the basis of recent returns. If you do, Professor Wermers argues, you should at least temporarily stop doing so whenever you think stocks' general trend may be about to shift from down to up. But that doesn't mean you should ignore all past performance at the beginning of a bull market, he added. After all, it is only the funds' returns during the preceding decline that are a particularly poor guide. At such times, he said, you should instead look back at periods much longer than the previous year or two. How far back to go? There is no consistent answer, he said, because the period needs to be long enough not to be dominated by any bear market years. Ten years might be enough in some cases, but right now the period should probably be even longer, because the stock market is lower today than it was 10 years ago. His advice presents a particular challenge to fund investors who rely on Morningstar's ratings, because a fund's overall star rating is heavily influenced by its recent performance. Morningstar does calculate a separate rating based on a fund's performance over the last 10 years; it is available on the firm's Web site. But even that longer-term rating is less than optimal now. Even better, Professor Wermers added, would be a rating "conditioned on the current state of the economy," such as a "5-star bear-market fund" or a "5-star bull market fund."
As American companies begin the first-quarter earnings season, the news on that front is hardly encouraging either. Q1-09 Profits are forecast to be down by 37%, according to Bloomberg. That will be the seventh straight quarterly drop, the longest losing stretch since, yes, the Depression. So what explains this dichotomy between share prices and fundamentals? Markets fell so far, so fast that they already reflected a lot of bad news. And prices rarely drop in a straight line. They often rebound as investors who have gone short (bet on falling prices) take profits. There were five rallies of 20% or more between 1930 and 1932, during the worst bear market in history. Investors have also been encouraged by signs that the pace of recession is slowing down. This factor has been dubbed "the second derivative", or the rate of change of the rate of change. Bulls have taken heart that some of the strongest recoveries have been seen in emerging markets, usually the most geared play on the global economy. March's 14.2% gain in the MSCI emerging-markets index was the best since December 1993. But David Rosenberg of Bank of America Merrill Lynch, one of the few Wall Street economists to predict the current recession, is sceptical. He points out that although the Institute of Supply Management's index of American manufacturing has rebounded from 32.9 to 36, the latter figure is still the fourth worst in the last 27 years. Capital Economics, a consultancy, says its recovery index suggests the probability that the American recession has ended is less than 10%. Other indicators also cast doubt on the idea of a sharp rebound. The Baltic Dry Index of freight rates is seen as a measure of global trade activity (although it is also affected by the supply of shipping). It bottomed in December, a staggering 94% below the May 2008 high. From that point, it more than trebled by early March, a sign of a rebound in activity. But it has since resumed falling and is down by around a third in the last four weeks. Nor is there any sign of a big pickup in commodity prices; the Dow Jones AIG index is above its recent low on March 2nd but is still less than half last July's peak. What seems to have happened is that the sense of extreme panic, marked in November and February, has receded. Volatility, as measured by the Vix contract on the Chicago Board Options Exchange, is around half last year's high. Global authorities are throwing everything they can at the crisis, and the hope is that a combination of low interest rates, fiscal stimulus and quantitative easing (the equivalent of printing money) will eventually succeed. A consequence of quantitative easing, that central banks have become buyers of corporate debt, has helped that market rally, if not as sharply as equities. In the meantime, the desire to hold cash at virtually zero interest rates is waning. According to HSBC, this year there have been no net inflows into American money-market mutual funds. Investors have been willing to hunt for bargains in bonds: spreads on high-yield bonds have fallen by more than three percentage points from their peak. But investors' enthusiasm could yet be tested by a further round of bad news. The results season will be the first test. Three out of four companies that have issued guidance for the first quarter have steered investors lower. In the second quarter of 2007, less than half warned of negative outcomes. Citigroup thinks the peak-to-trough decline in global profits will be 50%. Commercial property may also give investors as many headaches as residential. One of Boston's most notable buildings, the John Hancock Tower, recently sold at a foreclosure auction for $660m. In 2006 it was bought for $1.3 billion. Standard & Poor's, another rating agency, has said that many commercial mortgage-backed securities are highly susceptible to downgrades. The spread over Treasuries of the index by Markit, a data provider, of AAA-rated North American commercial mortgage-backed securities is now almost six percentage points, compared with just over one point last May. The economic data, having stabilised a little, could always turn down again. The relentless rise in unemployment will inevitably weigh on consumer sentiment. Industrial-production numbers in many advanced countries are still showing double-digit annual declines. Teun Draaisma, a Morgan Stanley strategist who has been one of the most successful forecasters of the market's recent ups and downs, thinks the bear market is not over yet. The fundamentals in terms of corporate profits, house prices and bank lending have not yet bottomed, in his view. And valuations are not yet at fire-sale levels; the cyclically adjusted price-earnings ratio of the American market is 14.5, compared with previous bear-market lows in single digits. The dividend yield on the S&P 500 index is just 3.2%, and payouts are likely to be cut. Of course, markets can spot recoveries in profits and economic fundamentals well before they are confirmed by the official data. Investors might be showing such exceptional foresight at the moment, or they may simply be spotting imaginary signs of life in a dead parrot.
That's not to rule out the possibility that the final low of the bear market is behind us (though I doubt it). What I do see as unlikely is a "V" bottom where stocks will now proceed to durably recover their losses without (at least) a very difficult and extended sideways period that take stocks back to levels that compete with the prior lows. Historically, advances of the size we've observed have only "stuck" when the major indices had already advanced past their 200-day moving averages by the time stocks were about 20% off the lows. There's a reason for that. During a true bottoming process, favorable market internals are typically "recruited" even as the market is moving down or sideways. Investors work through the ebb-and-flow of information through repeated cycles of enthusiasm and disappointment. To expect the disappointments to quickly come to an end and to be replaced by clarity is to expect something that is not characteristic of historical experience. As Russell noted, "When the tide reverses and turns bullish, there are usually many phenomena that appear. It is usual to see some sort of non-confirmation in the Averages (we saw that at the 1974 bottom). It is usual to see Lowry's Selling Pressure decline substantially prior to the actual bottom (Lowry's Selling Pressure declined very reluctantly prior to the March 9 low, and this alone makes me suspicious). Normally, once the tide reverses the stock market starts up carefully in a slow persistent plodding rise." Very simply, new bull markets are generally not widely heralded, and investors should be awfully suspicious when there is a consensus that "the bottom is in." As I noted back in December, in Recognition, Fear and Revulsion (before the market took a plunge to fresh lows over the next two months): "Strong intermittent advances are typical during bear markets, and can often achieve gains of 20% as we've seen in recent weeks, and sometimes substantially more. But the very existence of bear market rallies can be a problem for investors, because they clear the way for fresh weakness. The scariest declines in bear markets are typically the ones when investors think they are making progress and recovering their losses, only to see stocks go into a new free-fall. "That cycle of decline, followed by hope, followed by fresh losses, is really what ultimately puts a final low in place. The final decline of a bear market tends to be based on "revulsion" – a growing impatience among investors who conclude that stocks are simply bad investments, that the economy will continue to languish, and that nothing will work to help it recover. Revulsion is not based so much on fear or panic, but instead on despair and disillusionment. In a very real sense, investors abandon stocks at the end of a bear market because stocks have repeatedly proved themselves to be unreliable and disappointing."
John Mauldin discussed this issue in his newsletter last week. John still believes the recent rally is a suckers' rally and that we'll likely be working our way out of this hole for years. One reason for that pessimism is the conviction that earnings won't just snap back to pre-crash highs the way they have in recent recessions. Why not? In short, because the peak earnings of 2007 were inflated by leverage (debt), and that leverage is now been stripped from the system. Last time we went through an extended period of deleveraging, after the 1920s, it took 18 years for earnings to regain their old highs. If this recovery mirrors the 1930s recovery, S&P 500 earnings won't regain their highs until 2025 or so. John also thinks that the current rally in the stock market will fail as soon as the stimulus bleeds off and the Bush tax cuts phase out next year: "Let's look at a very interesting chart that shows all the cumulative drops in earnings from major peaks, along with the recovery paths. What is interesting is the divergence between the pre- and post-WWII periods. Our experience since 1945 is one of rather quick recoveries, averaging about 3-4 years until earnings rise above the old highs. The current earnings drop is 69.2% from peak earnings since 2007. Prior to World War II, it took 12-20 years for earnings to recover. Earnings are still dropping. We live in a world that is in a deep recession. There is massive deleveraging and deflation. The recovery is going to be quite slow, and that portends a slow recovery in earnings, which suggests protracted churning in the stock market. Even ignoring the disastrous 4th quarter of 2008, what if earnings drop by 80% or more, which is quite possible? That means they have to rise by 400% to get back to new highs. That could take some time. Even if they could rise at an unlikely 24% a year, it would take six years to see new highs. Look at what a mountain corporate earnings must climb. Consumers are retrenching, and savings rates are likely to rise for at least 3-4 years, back to 7% or more, leaving consumer spending not at 70% of US GDP but closer to 63%. That will be a rather large adjustment, and will mean that a lot of productive capacity will have to be closed or allowed to lie in disuse for a long time. We just built too many strip malls and car factories and restaurants. It is going to take some adjustments. Further, the Democratic Congress and the Obama administration are going to enact the largest tax increase in history in 2010, just as the economy is barely recovering. The Bush tax cuts go away, because the Republicans could not make them permanent when they had the chance. We are going to pay for that with a likely dip back into a recession in 2010, or at the very least a prolonged weak economy. How Fund Categories Fared WSJ 4-02-2008
The shift reflects the shocking stock market losses that began in 2007 and continued at the start of this year. "People don't want to be owners anymore; they want to be loaners," said Mike Scarborough, president of Scarborough Capital Management, an investment advisory business that specializes in 401(k) clients. Professional money managers have also begun to favor fixed-income holdings, according to a separate report released last month by Russell Investments. It showed that the professionals were more bullish about corporate investment-grade and high-yield bonds than about domestic or foreign equities. Could these reports be signaling that the bulk of investors have finally thrown in the towel on stocks? There's an old saw on Wall Street that a new bull market can't begin until most investors "capitulate," the market hits bottom, and the smart money then starts bidding stocks higher again. The evidence, however, isn't entirely clear. Many investors are certainly making their portfolios more conservative. For example, a vast majority - 78% - of the 401(k) assets that were removed from stocks in February went into guaranteed investment contracts or stable-value funds, which invest in bonds and bondlike instruments that are insured against losses by an insurance company. Only about a third of 401(k) plans offer cash-like investment options such as money market funds, so "stable value is the most conservative asset class in about two-thirds of plans," said Pamela Hess, Hewitt's director of retirement research. But Ms. Hess noted that while workers have been shifting more money than usual in their 401(k)'s, the total that was moved in February still amounts to just 6% of all assets in the plans. And 57% of new contributions being made into these retirement accounts are still being directed into stocks. Though that's down from 68% a year ago, it's still a majority. "Employee sentiment doesn't seem to be as bad as their asset allocation would lead you to believe," Ms. Hess said. So how can one explain the overall drop in stock exposure? In a word, inertia. As most investors left their accounts untouched, and as the Standard & Poor's 500 index of blue-chip stocks tumbled more than 18% in the first two months of the year (after falling more than 38% in 2008), the equity stake in these accounts contracted with the market. By not routinely rebalancing their portfolios - resetting them back to a desired mix of stocks and bonds at least once a year - investors are setting themselves up for failure, Mr. Scarborough said. "People are making short-term decisions with very long-term money," he said. "In all probability, the only time they're going to feel comfortable moving that money back into equities is going to be at the wrong time, after it's too late." Indeed, Mr. Scarborough noted that equity balances in 401(k)'s fell to less than 50% at the end of February. Since then, though, the S&P500 has surged nearly 15%. As far as professional investors go, the evidence is ambiguous. While the Russell survey found that more than two-thirds of money managers were bullish on corporate bonds, it also showed that 76% were bearish on Treasury bonds. "While the attraction to bonds last year was all about safety, what we're seeing now is about seeking returns," said Erik Ristuben, Russell's chief investment officer for North America. He notes that money managers are trying to take advantage of immense pessimism in the bond market - pessimism that has driven down corporate bond prices to a level that implies that the economy is as bad as it was in the Great Depression. "What is it that Warren Buffett says - be fearful when others are greedy and greedy when others are fearful?" Well that's what investors are doing when it comes to corporate bonds, Mr. Ristuben said. That's great news for the debt market and corporate bonds. Unfortunately, the equity market hasn't experienced this same level of fear and capitulation. Quick Facts, Stats & Opinions US philanthropists donated a total of $307bn in 2008, equivalent to 2.2% of the country's gross domestic product and a 6% - adjusted for inflation - slump on the previous year. This is the biggest fall over 12 months since records began in 1956 and the first drop in 22 years. Charity from businesses was the hardest hit. Corporate giving, which is closely tied to corporate profits, decreased 4.5 % to $14 billion last year. Individual giving, which is always the largest component of charitable contributions, was an estimated $229 billion, or 75% of the total, in 2007. The figures are published in a report by research company The Giving USA Foundation. (Tara Loader Wilkinson, Wealth Bulletin 6-12) The brute force of the recession earlier this year turned back the clock on Americans' personal wealth to 2004 and wiped out a staggering $1.3 trillion as home values shrank and investments withered. Net worth, or the value of assets such as homes, checking accounts and investments minus debts like mortgages and credit cards, declined 2.6 percent in the first three months of the year, the Federal Reserve reported Thursday. (Jeannine Aversa, AP 6-11-09) Incandescent light bulbs generate 90% heat and 10% light. The spiral-shaped "compact fluorescent" produces the same amount of light as its incandescent ancestor with one-quarter the energy. Lighting accounts for some 20% of residential electricity use in the U.S. -- a lot to fritter away as wasted heat. Yet about 80% of all bulbs sold to U.S. consumers are incandescents. Sales of compact fluorescents have dropped in the current recession, to 21% of total U.S. consumer light-bulb sales in 2008 from 23% in 2007, according to the DOE. In Europe and Japan, where electricity costs more, fluorescent lights are more popular. The LED is eclipsing the compact fluorescent as the cutting-edge bulb. Wal-Mart Stores has started selling a consumer LED bulb that uses just seven watts of electricity and claims to last for more than 13 years. It costs around $35 -- a daunting price tag for a light bulb. (Jeffrey Ball, WSJ 5-29) A recent review by Morningstar has found expense ratios for stock funds are on the rise in 2009. While they were flat in 2008 over 2007, funds have already begun raising them in 2009. U.S. stock funds are seeing the biggest increases while bond funds and international stock funds are steadier. Morningstar blames it on fund assets falling as a result of the stock-market crash. Fund assets were down $8 billion to $5.9 trillion in February 2009, Morningstar reported. With lower assets, the fee collections based are also lower, hurting the profitability of the fund companies. Morningstar drew the conclusion that some funds are trying to hold up profits to make them more attractive so another company will buy them. (The Seattle Times 4-19) Last year, many mutual-fund investors took two shots to the gut: Not only did their funds' value tank, they also got stuck with income-tax bills due to the funds. At the end of each year, funds often pass along capital-gains distributions to their investors. In 2008, investors received $90.77 billion in such distributions, Lipper says. (The Seattle Times 4-19) Professional investors are slowly dabbling in riskier investments, according to a survey of fund managers by Banc of America Securities-Merrill Lynch. They're holding just 4.9% of their portfolios in ultrasafe cash, down from 5.2% a month earlier. (The Seattle Times 4-19) The 10 bear markets since 1950 have bottomed down 20% to 57% (current) off the peak. The current bear is by far the worst since the Great Crash, which bottomed down 89%. The bear phases of these markets lasted from 3 - 30 months (we're currently in month 17). The drop from 1929-1932 was also about 30 months. Most of these markets offered some sort of "retest" of the low. Importantly, however, some did not. (As always, beware confident "technical" analysts) The S&P is now trading about in-line with its long-term price trend after 15 years of trading above it. So even if we have put in the bear-market bottom, it is likely that the S&P will eventually trade below trend for a considerable period of time. (Henry Blodget, The Business Insider 4-07) Home Page Previous Factoid Top Sites
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