Dire Warning From BusinessWeek

If there’s one place an investor can find clear direction in a sea of opposing opinions, it’s BusinessWeek. According to the following excerpt, we’re in for some tough times:

Stocks are swinging up and down more often and more violently than at any time since the Great Depression. As recently as 1995, the Standard & Poor’s 500-stock index traded all year without once changing 2% in a day. But [recently], it gyrated that much or more on 52 days — once in every five trading sessions — the most since 1938. The tech-laden NASDAQ now swings by at least 2% on two days out of five, vs. just once every 10 days nearly 30 years ago.

…fundamental changes are taking place that will likely alter investing and the very structure of the market for years to come. Millions of ordinary buy-and-hold investors, who have been a major stabilizing force in the stock market, are bailing out. If history is any guide, those investors won’t jump back in quickly… “This is a new, rapid-fire trading kind of environment that just stymies average investors,” says James W. Paulsen, chief investment officer at Wells Capital Management. “Old dogmas like ‘buy and hold’ just don’t work.”

In fact, says Richard Bernstein, chief U.S. equity strategist at Merrill Lynch & Co. (MER), a big reason for the recent market volatility and falling stock prices is that investors are just beginning to see how vulnerable stocks are to unpredictable corporate earnings. “Investors have been underanticipating risk,” he says. Sooner or later, they’ll become less willing to pay up for stocks with more volatile earnings and wild price swings. And they’ll demand lower share prices as compensation for the extra risk they’re taking. “Even if a cyclical bull market reappears, it’s likely to be modest,” says Charles Pradilla, chief strategist at SG Cowen Securities Corp.

On top of all that, the markets have to deal with heightened geopolitical risk.

We aren’t necessarily condemned to a multiyear bear market. But perhaps investors should be prepared for several “mini-bear” and “mini-bull” swings of at least 20%, which occurred in the five years preceding the 1973-74 bear market and in the eight subsequent years. There are, of course, big differences today: Inflation is nowhere near the heights it reached then, interest rates are low, and the Federal Reserve has been proactive.

In any case, many average investors are again paralyzed by market uncertainty. Hiding behind decimated portfolios — or cash, if they’re lucky — they’re afraid to jump back into the fray.

That doesn’t look good, eh?

Before you get too nervous, ask yourself when it was written. Last weekend? Before the lows in March? Before the lows in January?


Try the March 10, 2003 issue, just before the spectacular recovery from the dot com bust got underway in earnest. Here’s how the S&P; 500 did after the article:

  • +37% in one year
  • +44% in two years
  • +57% in three years
  • +88% through last October’s high
  • +69% through yesterday’s close

Folks, if you never invest until there’s an all-clear signal, you’ll never invest.

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