Wheres the bottom? Bruised investors on Wall Street keep asking the question after another brutal week of losses. But a growing sense of fear and gloom make it risky to bet that the worst is over for the shrinking economy and stock market.
The relentless bear market savaged the Dow Jones Industrial Average of blue chips, which fell 6.17 percent on the week to 6,626.94, just above a 12-year low. The broad-market Standard & Poors 500 sank to its level since 1996 over the past week, and lost 7.03 percent for the week to 683.38.
The technology-heavy Nasdaq composite fell 6.1 percent over the week to 1,293.85. The Dow and S&P have already plunged 24 percent so far in 2009 and the Nasdaq nearly 18 percent.
The horrific bear market has been reinforced by fears of an ever-deepening world-wide slump that has hit small and large firms alike, forcing massive job cuts and denting consumer spending as part of a downward economic spiral. Some say the market, down over 50 percent from 2007 highs, has priced in a deep recession but may have to fall further if the slump becomes a depression - which could erase stock values by 90 percent if it follows the pattern of the 1930s.
"Investors should not rush in," says Richard Berner, economist at Morgan Stanley. "Now that equities stand at 14-year lows and 55 percent below their October 2007 highs, they do reflect a lot of bad news - but maybe not quite enough. The further slide in production that we expect suggests that the near-term risks for earnings point down, and a rapid turnaround seems unlikely."
Gregory Drahuschak, analyst at Janney Montgomery Scott, said the market is ripe for a rebound but few are courageous enough to bet on it. "The rate of descent in recent months has been so severe that a countertrend rally could arise with no warning and no apparent reason," he said. "At the same time counting on this is a reckless approach."
Some analysts say investors are not looking far enough ahead or far enough back in history to realise the slump will end sometime, and possibly sooner than anticipated. "If your sense of market history goes back further than five or 10 years, the many disappointing numbers all seem to line up with other historical periods," said Bob Dickey at RBC Wealth Management.
Dickey said however, that the "bottom" for the market is a process instead of a definite number. "We want to know what the bottom number is, but unfortunately, there isnt one," he said. "The support needs to be created over a short or long period, but to expect it to be right at a particular number is a fallacy."
Many investors are ready to throw in the towel on the stock market if they have not done so already. Ironically, some analysts say this is a signal that the selling pressures are being exhausted, allowing a new rally phase to begin.
"They say its always darkest before the dawn. Well, this week bordered on a full-scale blackout," said Douglas Porter at BMO Capital Markets. "Stocks punched through to new multi-year lows, including all the way back to pre-irrational exuberance levels (December 1996) for the S&P 500."
Some cite a JPMorgan Chase research report showing that 12-year lows are rare occurrences - occurring in 1932 and 1974 - that coincided with market bottoms. Barry Ritholz at FusionIQ said establishing these lows "by no means is proof the bear market is over" but he said it "does present a real possibility of a strong market rally."
Liz Ann Sonders, chief investment strategist at Charles Schwab & Co., counsels investors not to give up hope. "The pressure on the market currently feels a lot like 2002-2003, when every speckle of hope was dashed and the cycle of negativity continued," she said.
"But history is full of examples of the stock market finding its footing while the economic news is most bleak." Bonds rallied in the week amid the intense investor caution.
The yield on the 10-year US Treasury bond fell back to 2.828 percent from 3.041 percent a week earlier and that on the 30-year bond eased to 3.503 percent from 3.722 percent. Bond yields and prices move in opposite directions. In the coming week, the market gets a breather from the relentless flow of economic news, which has been mostly negative. One key report will be a government survey Thursday on retail sales for February, a key to economic activity.
IHS Global Insight said that consumer spending "continues to face fierce headwinds from sharp drops in employment and declining household net worth, so real spending overall is still expected to drop in the first quarter of 2009."
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