5 bear rallies in 1930sDuring the early 1930s, the Dow Jones industrial average staged five bear market rallies of 20 percent or greater before hitting an ultimate bottom in 1932. The most famous was a 48 percent gain in 1930. Tom McManus, chief investment officer with Wachovia Securities, says the market will give up at least half of its March gains. "We are in a bottoming process, where the market is winnowing out the winners from the losers," he says. "March 9 was probably a bottom for the quality stocks. It's probably not a bottom for the lower-quality stocks." He says there's a 40 percent chance the overall market could fall below its March 9 low.
Durables are volatileMcManus doesn't put much faith in the signs of stabilization that some analysts see, such as better-than-expected reports on durable goods, home sales and retail sales. Durable goods is so volatile, he says, "I would never use it as a signal the trend has changed." Some analysts cheered when the government reported that retail sales in February were down only 0.1 percent (economists were expecting a 0.5 percent drop) and revised January's surprise increase upward to 1.8 percent from its original estimate of 1 percent. When you look at the drop in retail sales over the previous three to four months, "the size of the improvement is microscopic," he says. "It's like saying your kid took a test and got 1 right out of 20. The next time he got 2 right out of 20. You could say, 'Wow, he did twice as well.' But it was still horrible." McManus says the S&P 500 might "bounce around 700-900 for another six months." It closed Friday at 816. Its low on March 9 was 677. He says the economy will start to recover at the end of 2009 or early next year. He warns that investors should not try to pick the exact bottom. Instead, they should put money into the market gradually over the next six months. Five years from now, that will look like a very smart investment.
Patience can pay off"The valuations are very attractive. Someone who is patient can make money. Focus on improving the quality of your portfolio," he says. That means dumping stocks that have gone down the most and putting money into high-quality companies that have been hurt less. Rob Arnott, chairman of Research Affiliates, is gloomier on the economy. "I don't see how the economy can turn around while we are engaged in this massive de-leveraging," he says. "Resources are being siphoned to pay down debt, both household and corporate debt. This process is going to take time, a lot of time. It's dangerous to assume the economy can suddenly pick up when the de-leveraging process is only just now gaining full steam."
Growth seen in 2010Arnott says the economy won't start growing until 2010 and employment won't pick up until 2011. "I think unemployment will crest above 10 percent, perhaps significantly above. This will be ugly," he says. For now, Arnott says investors should put money into corporate bonds, not stocks, on the theory that the stock market can't really recover until the credit markets do. He says that corporate bonds did not show the same improvement in March that stocks did. Until they do, "I don't think this is a real bull market," he says.
Net Worth runs Tuesdays, Thursdays and Sundays. E-mail Kathleen Pender at [email protected].
This article appeared on page D - 1 of the San Francisco Chronicle