I read this article the other day and thought it relative to the current market situation so I am passing it on in this blog. Hope you find it interesting.
Q: How does this drop compare with others?
A: At its low on Monday, the Standard & Poor’s 500 index was down 52.5 percent from its October 2007 peak. That makes it the third worst bear market since 1929. But the speed of the fall is the real story. In the past, it’s taken 21 months for stocks to fall this far. This time it only took 13 months.
The drop in stocks has also been playing out all around the world.
“The swiftness and the severity of this bear market I think were unprecedented — partly the global nature of it,” said Sam Stovall, chief investment strategist at Standard & Poor’s.
Q: The drop was fast but it still feels like stocks just can’t pull higher. Is this downturn longer than normal?
A: Since 1932, this is the longest time stocks have spent near a market bottom, according to Marc Reinganum, director of quantitative research and senior portfolio manager for Oppenheimer Funds.
Q: What has needed to happen in the past to turn a slumping stock market around?
A: Wall Streets need some source of hope. It could be as simple as one bit of news that acts as a catalyst for a rally. Investors will pounce once they believe the economy is poised to turn higher. But first, pessimism has to be running so high that many investors simply want to walk away.
Because many investors are laying bets for the months ahead they often look beyond the news of the day. So the market can recover well before the economy as a whole.
In the past 60 years, the S&P 500 has hit its low a median five months before the recession has ended and nine months before either corporate earnings have hit bottom or unemployment has peaked, according to S&P.
Q: What are the signs of a bottom?
A: A market bottom can bring punishing drops in prices, heavy trading volume and a large number of stocks that hit new lows. The cathartic sell-off is like a brush fire that drives many investors from the market but clears room for a recovery.
“Bear markets don’t end in whimper. They usually end with a crash,” Stovall said.
Q: What might a recovery look like?
A: That’s the good part. History shows that the rallies coming out of a bear market are far stronger than most advances.
Curtis Teberg, portfolio manager at the Teberg Fund, likens the market’s fall and recovery to a basketball thrown hard at the ground: The ball’s ascent is fastest right after it begins its bounce and its climb slows as it gets higher.
“The biggest bounce will come immediately and whoever is there will get to participate,” he said.
In bear markets since 1932, the S&P has gained an average of 46 percent in the 12 months after stocks hit bottom. The gains range from 21 percent to an incredible 121 percent.
Q: The slide has been so unnerving. Should I even bother to wait for a rebound?
A: Sticking around can pay off for those with the time. In the first year of a recovery investors have recouped an average of 82 percent of what they lost in the entire prior bear market, according to Stovall.
“Unless you believe that the world economy will stop and that all stocks will go to zero, one of these days this bear market will end,” he said.
Nervous investors should decide how soon they need the money. Stocks are for long-term investing. For those who can wait, cashing out at the market’s lows will only lock in the losses.
“It certainly is not the time to say ‘OK, I’m going to put everything in today,'” said Teberg. Instead, he recommends investors put one foot in the market at a time with money they won’t need right away. That way they can take advantage of deals on beaten-down stocks without risking too much at once.
Teberg is less nervous about the market at these levels than when stocks were at their peak in late 2007.
“At some point in time we will again see the market at those levels, which means there is a 100 percent gain for those who are willing to get into the market.” Investors just have to be willing to wait, he said.
“This market has never gone straight up or straight down forever.”
Barbara Gray, CFP®
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