Thursday, January 1, 2009

Happy New Year From the L.A. Times

HaPpY NeW YeAr!

Business

Investors' big question:
Will stocks' slide get even worse?

A worker cleans up the floor of the New York Stock Exchange after the final trading session of 2008.

As Wall Street ends its worst year since 1931, some analysts say history
is no guide in predicting what's next.


By Tom Petruno and Walter Hamilton January 1, 2009


Wall Street on Wednesday closed out its worst year in more than seven decades, battered by a devastating credit crunch that smashed investor and consumer confidence and fueled fears of another Great Depression.

The Dow Jones industrial average plummeted 34% for the year -- the steepest drop since the blue-chip index crashed 53% in 1931, the second full year of the Depression.








NYSE traders


Many broader market indexes lost more than the Dow did in 2008 as nearly $7 trillion of the country's stock-market wealth was wiped out.

Despite widespread belief among experts that the U.S. isn't on the verge of a 1930s-like economic collapse, the mammoth market loss taunts the optimists. And it has left many individual investors understandably wary.

Rodney Punt, a 63-year-old Santa Monica retiree who has less than 20% of his investment portfolio in stocks, expresses interest in buying beaten-down shares as the new year begins, but isn't yet sure about risking his money. "There is still a downward spiral in the real economy," he said. "Is it a recession? Is it a depression?" As Punt tries to gauge the depths of the economy's woes, what he and other investors decide to do with their money in 2009 could foretell the return of growth: Typically, stocks begin to rally four to seven months before the end of a recession, as investors anticipate a recovery in corporate earnings.

With the current recession already a year old, most economists expect a turnaround in the second half of 2009. If the market follows the usual script, stocks should show a significant pickup beginning in the first quarter of the new year.

A rising market could be a confidence builder for the economy, including for corporate executives who are wrestling with how many more jobs to pare as they cope with sinking sales.

Paul Hickey, a partner at Bespoke Investment Group in Harrison, N.Y., noted that stocks have a track record of rebounding in the year after a harrowing sell-off.

The Dow's 10 worst yearly losses since 1896 were followed by rallies the next year in eight of those instances.
The glaring exceptions: 1930 and 1931.

Some investment professionals caution against putting too much faith in historical trends. This recession has been different from most, rooted in the bursting of the housing bubble and magnified by a credit crunch unlike anything the world has experienced in modern times.

Paul Desmond, president of Lowry Research Corp., a stock-research firm in North Palm Beach, Fla., says predictions about the economy and the market should be taken with more than the usual dose of salt -- given that almost no one foresaw the severity of what transpired in 2008.

"What makes you think their projections for 2009 are going to be any better?" he asked.

Investors know too well how we got here: What began as a U.S. housing market crash two years ago spread like a wildfire through the global financial system in 2008, as losses on mortgage-related securities toppled pillars of the banking industry and caused survivors to simply stop lending.

For the economy, already weakened by soaring energy prices in the first half of the year, the shutdown of the debt markets in the second half was a body blow that caused many consumers and businesses to halt spending. As the economy fell off a cliff beginning in September, stock markets worldwide went too -- taking countless nest eggs with them.

The average U.S. stock mutual fund lost 38% for the year; the average foreign stock fund lost 46%.

In recent weeks, however, many world stock markets have stabilized and moved modestly higher. The Dow, which closed at 8,776.39 on Wednesday, is up 16% from its five-year low reached Nov. 20.

The now well-hewn argument against the risk of economic catastrophe on the scale of the early 1930s is that the federal government, and the Federal Reserve, have thrown trillions of dollars into the fight to bolster the financial system, get credit flowing again and revive confidence.

President-elect Barack Obama has promised to add a huge fiscal stimulus program.

Large-scale government intervention was missing as the Depression unfolded in the '30s, until President Franklin D. Roosevelt took office in 1933.

As things worsened, the stock market fell for four straight years from 1929 through 1932, for a total loss of 89% on the Dow from peak to trough.

This time, the Dow's decline from its all-time high reached in October 2007 is a far more modest 38% -- so far.

Yet many stocks are at or near their lowest levels in a decade or more, and are selling at low prices relative to per-share earnings.

Optimists believe that long-term investors won't be able to resist depressed stocks in the new year, particularly with so much cash sitting in short-term accounts paying virtually no interest.

The panic selling of the last few months "has created massive sidelined buying power," said James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.

Assets of money market mutual funds, for example, hit a record $3.76 trillion this week, according to iMoneyNet Inc. Yet investors in money funds are earning an average annualized yield of just 0.76%.

Analysts who remain cautious about stocks believe that that cash hoard sends a troubling message: Many investors would rather earn a near-zero return on their money than risk it in stocks even at slashed prices.

"If stocks were real bargains, we ought to be seeing people rush in to take advantage, and we're not," Desmond of Lowry Research said.

One key issue is that there still is little confidence that the housing market is bottoming.

"Stabilization in home prices would mark a major turning point in the crisis," economists at Goldman Sachs & Co. said in a report to clients Wednesday. "Unfortunately, such a stabilization does not look imminent."

Goldman projects that U.S. home prices, on average, will drop 15% more over the next year. That could worsen the spiral of mortgage defaults and foreclosures, undermining the government's attempts to restore the banking system to health and make credit easier to get.

Some investment pros say that, even if U.S. stocks don't fall much more, any rebound from here could be anemic. The odds of a rip-roaring new bull market soon are slim, they say, because the economy -- and corporate earnings -- could struggle for years as consumers work down the mountain of debt that helped drive spending over the last two decades.

Demographics also may be a weight on the market: Many aging baby boomers are likely to be selling stocks to fund their retirement or to shift to less volatile investments such as bonds, said Ed Clissold, senior global analyst at Ned Davis Research Inc.

Clissold says his firm believes stocks could rally in the first half of 2009 on optimism about an economic turnaround, then slump again in the second half as weak growth disappoints investors.

Gail Dudack, a veteran analyst and head of Dudack Research Group in New York, says the market may be in a long stretch that "isn't a bull or a bear, but a workout period."

With the dive in share prices in 2008, the bull market gains of this entire decade already are gone: The Dow is down 24% since Dec. 31, 1999.

That, too, is likely to deter some buy-and-hold investors from wanting to take a chance on stocks now: They've already gone nine years with nothing to show for their trouble.

Wall Street has been through these periods before. From 1966 through 1981, the market overall experienced many sharp rallies and steep declines, but the Dow ultimately saw no net price appreciation over those 16 years.

Such a period requires a different approach to stock investing, Dudack said. "It's not about growth," she said. "It's about survivorship."
Hamilton reported from New York and Petruno from L.A. tom.petruno@latimes.com walter.hamilton@latimes.com

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