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Down market hits year mark with no end in sight

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Associated Press and Gazette Staff
October 9, 2008

The bear market ravaging investor portfolios is now one of the worst in modern U.S. history.


It has wiped out more than $7 trillion in shareholder value, and no bottom is clearly in sight.


No one can predict with any accuracy when it will stop or how far it will drop, but a UW-Whitewater professor said investors need to make an honest assessment of their financial situation before fleeing Wall Street.


"I don't think the rules are changing, I just think right now people need to pay a lot more attention to the rules," said Russ Kashian, an economics professor at UW-Whitewater.


"When the market is up, mistakes are easily masked. But when the market is down, you need to review the textbook and ladder your money."


A year ago Thursday, Wall Street was celebrating the fifth anniversary of a bull market that had created $10 trillion in shareholder wealth since 2002. The Dow Jones industrial average and the Standard & Poor's 500 index hit all-time highs on Oct. 9, 2007.


A headline in USA Today captured the sentiment at the time: "Market's run could keep going for a while."


In fact, the party was over. The subprime mortgage problem that was laid bare by a decline in home values developed into a much broader credit crisis that toppled giant banks and financial institutions.


Panicked investors have been fleeing from stocks. The S&P is down 37 percent from its peak of 1,565 a year ago, closing at 985 on Wednesday, and the Dow has tumbled 35 percent from 14,164 to 9,258.


Jim Cramer, the normally bullish host of CNBC's "Mad Money" program, caused a stir Monday when he warned investors to take whatever money they need for the next five years out of the market now.


On Tuesday, he called it "the most horrible market that I've ever seen."


Kashian said this morning that what Cramer said was conventional advice for investors.


"I don't know that that has changed," Kashian said. "If you need the cash in the near term, get it out of the market.


"If your kid is 17 and looking at college, get it out. If your kid is 2, it doesn't make sense to take it out because it will get eaten alive by inflation."


Down markets are the time investors need to take a deep breath, look at their individual situations and prioritize their financial needs, Kashian said.


"If you know you're going to need the money in the next few years, take it out of the market, but then ladder the rest of your portfolio based on your longer-term needs and objectives," he said.


No economic turnaround is seen before 2009 or later. And there is a wide divergence of opinion on the future of this bear market, which feels unlike any other because of the $700 billion federal bailout and the collapse of investment banks.


Most experts don't see a recovery until there's greater stability in the housing market, banks are lending freely and employment improves.


Unlike other periods that saw precipitous drops, this one is rooted in foundering credit markets. That makes predictions more difficult than if the plunge were based on company profits or stocks alone.


"When you have an environment like this where the crisis is so deeply rooted from the credit standpoint, it adds an extra layer of ambiguity and ultimately of uncertainty," said Mark Freeman, portfolio manager for Westwood Holdings Group Inc. "That is what the markets are struggling with."


Even with the Federal Reserve and other major central banks around the world slashing interest rates Wednesday, experts were hesitant to call it a bottom.


"Technical indicators tell us that we're overdue for at least a short-term bounce," said Liz Ann Sonders, chief investment strategist for San Francisco-based brokerage Charles Schwab Corp. "That doesn't tell us that the bear market is necessarily over."


This bear market—a term often defined as a prolonged drop in stock prices of 20 percent or more—already is harsher than most of the 10 bear markets since the 1930s. Those markets lasted an average of about 16 months from peak to trough, with average stock losses of 31 percent.


Since the record 83 percent plunge in 1929-32, the current market is exceeded only by the drops of 49 percent in 2000-02 during the tech stock implosion and 48 percent in 1973-74 during a recession and energy crisis.


The magnitude of this decline is close to that of the dot-com collapse earlier this decade, but this time, it's not just retirement accounts and stock portfolios that are being hurt. Increasingly, the availability of loans and credit is drying up, too.


Rob Arnott, chairman of Research Affiliates LLC in Newport Beach, Calif., thinks the big difference this time is that Americans are feeling increasing pain apart from the stock market.


"People in 2000-02 saw their 401(k)s become 201(k)s, but the impact on their personal lives otherwise was minimal," he said. "This time, it is starting to be significant. People who have home equity lines and use them to pay for holidays or buy a car are finding that their loan facilities are getting pulled. That affects the way they look at their own spending."


He predicts another six to nine months for this bear market.


Some are far more pessimistic.


Money manager Peter Schiff, who has long espoused the bleakest of market views, said the Dow has a good chance to sink to 7,500 or lower. He expects the bear market to last another five years or more. That would signal a possible loss of at least 20 percent more in shareholder value.


"Everybody wants to think there's a government solution to spare us the pain," said Schiff, who runs the investment firm Euro Pacific Capital Inc. in Darien, Conn. "There is no government solution. All there is is more pain."


One wild card is that a recession—unofficially defined as a decline in the gross domestic product for two or more consecutive quarters—could seriously crimp consumer spending, which accounts for two-thirds of U.S. economic activity.


Without that money flowing into the economy, a rally in stocks may be unlikely.


Once the bear market ends, investors could still have a long wait to recover their losses. After a stock market index falls 33 percent, it has to rise 50 percent just to get back to where it started.



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