Markets dropping

[Magick1]

http://www.nytimes.com/reuters/busin...ts-stocks.html

What's everyone's feeling about the markets?

When do you think we'll recover!

I know that my retirement portfolio is sure taking a hit, and I would like to see it start heading up any time!

[brian_igo]

Yeah, the Dow dipped below the post-September 11 low this morning. This is the longest bear market since the Great Depression (at 28 months and counting) and there is no immediate end in sight.

When we'll recover depends a lot on how you define recovery. If you're talking about getting back to a Dow in the 11,000-12,000 range you're going to have a long wait. Even the most shameless cheerleaders of that last market are now saying it was all a bubble. The market fundamentals never supported those numbers.

My definition of recovery is really modest. I think we'll be in full recovery when the bellweathers and major indicies can outpace inflation by five to seven points. That is going to be a rude awakening for a generation of investors who came of age with mutual funds advertizing 20% annual growth (or more) over three years. But historically, clearing five to seven after inflation is considered a good market.

The reason I think that will be our most realistic goal is because the factors that have driven the growth in the market over the past two decades have run their course.

First, we've seen an incredible growth in the percentage of Americans who own stock over that period. The SEC made it easier for small and private investors to buy stock in the mid-seventies. But the real movement to get in didn't start until the IRA program was launched in the early eighties, and it exploded in the nineties with 401k's and online trading. Thousands of new companies went public, but the trend over this time has been more investors chasing a given number of stocks, and that pushed prices up.

That would be leveling off regardless of what the market did. The baby boomers' market influence has peaked. In the next couple of years we'll start to see the oldest boomers move from growth investments into income holdings to lock in their gains and prepare for retirement. In five years this migration will be fully engaged, and it will continue for another decade after that. But the fat part of the Gen X curve coming up behind the Boomers will still be a decade away from their prime earnings years. They are much smaller in numbers than the Boomers. And without a huge bull market it is very uncertain if they will enjoy the kind of income growth the Boomers had in their 40's. Bottom line, without an extraordinary event there won't be as much money available to put into the market and overall stock prices will fall.

The second thing that drove the growth of this market was technology. Not the performance of tech stocks or even the creation of an entire new industry over the last twenty years. (Though that did not hurt.) What I'm talking about is how technology has fueled a rise in productivity that we haven't seen since the industrial revolution. This has really been a once in an every other lifetime event.

But we're getting to the part of the curve where the new innovations have a much lower impact on productivity and profitability. We can tweak the system but it will be a long time before we see the kind of revolution bar coding brough to inventory control and shipping, or Lotus 1-2-3 brought to book keeping.

Neither of those factors are in play anymore, and honestly they haven't been for a few years. I think the market has carried forward on the momentum it built through the eighties and nineties, climaxing in the dotcom bubble.

If those were the only factors in play, we would probably see what Alan Greenspan famously forecasted as a "soft landing". The dotcom speculators would have been burned as speculators often are, but the core of the market would have fallen gradually to a sustainable level, and we probably would have built gradually on that until our grandkids come up with the next revolution.

That all went out the window when the accounting scandals became impossible to ignore. Enron was not the first. But it was so big and the fall was so spectacular, that it brought attention to every fall that followed. This weekend World Com will steal Enron's title and become the largest bankruptcy in history, and I'm not convinced that World Com will hold on to top spot for long.

The problem with analysts and prognosticators who are trying to predict the cycle of this market is that they are not including the issue of trust. That makes this different from every bear and bull cycle this side of the Great Depression, and that took five years for the market to begin to turn.

I heard someone say this morning that investors have become a lynch mob, and its a good analogy. Washington has been way, way behind the curve on this, people have lost billions of dollars, and they're grabbing the rope at the first news of another scandal. This morning Nicor, an Illinois utility and energy company, is down over 50% on news that one of its divisions engaged in round-trip energy trades a' la Enron. AOL is reported to have inflated its earnings while it was taking over TimeWarner and its getting the snot knocked out of it today. Johnson and Johnson is under investigation for allegedly covering up quality problems at a drug plant in Puerto Rico. And the market is kicking J&J in the groin.

This will go on until everyone has a clean house, or until investors recover faith in the integrity of the market and the nation's business leaders. Then it will be very shaky for a while. After that, when the market earns the confidence of investors again, then it will begin to go forward.

How low will it go? I don't know. I wrote here in early June that I suspected the third and fourth quarters would be the worst as companies that examined their accounting practices after Enron uncovered problems, and that is bearing out. Right now we are getting one company a day admitting its prior claims were wrong or that they did things that inflated their earnings. The fall of the overall market won't stop until that torrent of discoveries does.

I still say Q1 of 2003 at the earliest for a turn around.

Give yourself a pat on the back for finishing this...


Brian

[erik_kosberg]

I’ll make mine a bit shorter than Brian’s.

FWIW, I think that the bear market is still only in its early stage and that we’re headed MUCH lower. The S&P 500 is at 857.81 right now; I think that it’s got about 300 more points to go before we find a bottom. I also think that the Dow will lose at least 2,000 more points from here, maybe even 3,000. But I think that even though many investors are going to suffer, those who invest in bear funds and metal stocks will do quite well. I’m putting my money where my mouth is and have a good chunk of my portfolio in stocks like DROOY, SSRI, and PAAS. I’m looking to pick up some AEM and HL on dips.

Nothing in this post be construed as investment advice and anyone who would make investments based on what they read on a discussion board would deserve to lose the shirt off their back.

[frazzledspice]

We chickened out of the stock market well before September 11, and although we still have some individual stocks, our 401K's have been safe for a long time.

When you're in your 50's, you can't afford to let your retirement money take a fast plunge to the basement and a slow rise back to where it had been.

But I have been thinking more and more about Wal-Mart. The worse the economy gets, the more people will shop at Wal-Mart. It's already the biggest company in the world. It's not exciting--but will anything be exciting for a long time?

And, living in Arkansas, Wal-Mart is always talked about and written about, and probably most people have a little piece of it.

[vonboob]

You guys are probably right on everything. I'm not so sure about the slow recovery though. The only thing certain about the market right now, is the huge amount of cash just waiting out there. When and what it will take to push it the other direction? Probably a major political or scientific breakthrough but once it tips, might skyrocket very fast...

[AuntieEmma[$]]

It feels too much like a gamble to me right now. There are really good arguments for why the market might turn around soon -- and equally good arguments for why it might keep on dropping for a long time.

[Magick1]

The market's always been frightening to me, regardless of whether it's bull or bear.

There are so many wonderful sites out there now, and individual investment groups helping people feel comfortable out there.

But, who has the extra cash or time to really work the markets?

Hopefully, things will turn around quickly! Thanks everyone for your feedback!

It is interesting to see the difference in opinion of the market!