Oh, get on with it

The New York Times has an article by Conrad de Aenlle about the stock market:

A strong, broad rally in March helped the stock market bounce back from an awful start to the year. That lifted spirits on Wall Street much as it lifted share prices— but only part way, and not nearly enough to undo the damage of the previous year.
A recovery of almost twenty percent in the Standard & Poor’s 500-stock index from the low of early March still left the benchmark with an 11.7 percent loss for the first quarter. That, as well as several false dawns for the market last year, explains why the mood has swung from despair to something closer to relief than euphoria.
Among investment advisers, the widespread view is that conditions in the market and economy appear better, but they are reluctant to say that a lasting bottom has been reached in either. Buying stocks makes sense, many say, but instead of chasing the rally and making a big bet, they recommend building positions a bit at a time, especially on market pullbacks. There have been plenty of those. The year began on a hopeful note after stocks spent December rebounding from their low the month before. But the hope and the rally dissipated quickly, as the extent of the economy’s woes became clearer.
The unemployment rate has risen to 8.5 percent from 4.4 percent in two years, and monthly net job losses of more than a half-million have become routine. Gross domestic product fell at an annual rate of 6.3 percent in the fourth quarter of 2008, and a similar loss was expected for the first quarter of this year. The housing market remains enfeebled, although sales figures announced last month showed a semblance of stabilization. And, not surprisingly, measures of consumer sentiment have been scraping along near record lows.
Some attribute the continuing weakness in stocks not so much to these problems as to solutions devised in Washington. One plan after another, offered by one presidential administration after another, was judged unequal to the task by Wall Street.
Komal Sri-Kumar, chief global strategist at the TCW Group, identifies 10 February as the day when “the market’s lack of enthusiasm for the Obama administration” crystallized. Treasury Secretary Timothy F. Geithner was supposed to lay out a comprehensive plan to fix what ailed the financial system, but what he outlined was regarded as just that— an outline. “After this tremendous buildup that Geithner was going to tell you what the solution is, it was clear that he did not have a plan yet,” Mr. Sri-Kumar said. Instead, he said, ideas have been floated “in dribs and drabs on a daily basis”.
As far as Wall Street was concerned, Mr. Geithner evidently hit the right note last month, when he announced a program to provide incentives for private investors to take up to $500 billion in toxic assets off the hands of banks. That sent the stock market up about seven percent on 23 March, but Mr. Sri-Kumar wonders whether that plan is better than the others. He said a months-old problem remains: banks want more money for the bad paper than investors are willing to pay.
Mutual fund performance data compiled by Morningstar shows that investors were unwilling to pay for much of anything for most of the quarter; the average United States general stock fund lost 8.3 percent. That’s better than the S&P 500 was able to muster, but it still helps to add up to a 36.1 percent loss over the last four quarters.
Among eight flavors of sector funds tracked by Morningstar, real estate fared the worst in the quarter by losing, on average, 29.8 percent, while financial services lost 15.8 percent. Precious-metals funds performed best, rising by an average of 11.5 percent, followed by technology funds, up 4.2 percent. Funds focusing on international stocks lost 9 percent in the period, on average, dragged down by weakness in Japan and Europe. Emerging-market funds performed much better, but still fell 1.7 percent. Bond funds kept their heads above water as investors sought safety in Treasury instruments and as the perceived risk of owning corporate debt waned. The average taxable bond fund rose 1.3 percent.
It is hard to pinpoint a reason for the stock market’s abrupt turnaround last month that is tied to corporate or economic fundamentals. Investors may have just reached a point where they had little left to sell. Blaze Tankersley, chief market strategist at Bay Crest Partners, an institutional brokerage firm, said that even the most stable, defensive stocks had been sold heavily, including companies like Johnson & Johnson, McDonald’s, and Procter & Gamble. “When you look at that type of action, it’s like they’re shooting the last generals,” Mr. Tankersley said. “There’s finally no place left to hide. It’s an indication that the bear market was extremely advanced.”
The rally may also be a result of a realization that there was more selling than was warranted by the deterioration of fundamental conditions. It’s not so much that investors believed that the cures offered by Washington suddenly were all that good, but that the disease was not all that bad. “We’ve certainly seen panic and capitulation a couple of times in the last few months,” said Brett Hammond, chief investment strategist at TIAA-CREF. “It’s very easy for people to say, ‘This is the most extreme’ fill-in-the-blank. Things are bad and getting worse and it’s time to hunker down, but that’s not to say all is at an end and we’re in the worst depression ever. It’s not as bad as the ’30s.”
The selling through most of the last two quarters may not have been the most extreme ever, but it has had few precedents. By one measure, stocks went beyond the garden-variety oversold-condition that is often reached during routine zigs and zags to the kind of washout that occurs very rarely and only after a long, steep downturn.
Duncan Richardson, chief equity investment officer at Eaton Vance, noted that popular averages reached a twelve-year low in the quarter. That situation had occurred only twice before in the last eighty years: in 1932, during the Great Depression, and in 1974, in the aftermath of the Watergate scandal and the Arab oil embargo.
A twelve-year low “is a once-in-a-generation” event, Mr. Richardson said. The last two such lows gave way almost immediately to long bull markets, so will this one produce another once-in-a-generation buying opportunity? Probably, investment advisers generally predict, but probably not yet. Many financial and economic problems remain to be solved, so a retest of the March low may be in store. An erosion of the recent improvement in sentiment may hasten a market reversal.
“What I’m afraid of is when people get their first-quarter statements, they’ll say, ‘That’s it, I’m done,’ ” said Michael Avery, chief investment officer at Waddell & Reed and co-manager of the Ivy Asset Strategy fund. He added, “I’m not really sure why we’ve had the rally we’ve had.” Befitting such doubt, only twenty-eight percent of his portfolio is in stocks. He has forty percent in cash, twenty percent in gold, and the rest in bonds.
Mr. Richardson’s main short-term concern is a different sort of first-quarter statement. “The market is going to have to fight through what probably will be horrible earnings,” he said. “There won’t be good news there.” But he wonders whether investors might shrug it off as something they have seen before. As low as prices have fallen, “things don’t have to be great for the stock market to go up,” he said. “They just have to stop getting worse.” There is widespread agreement that the long term is more promising than the short term. The next few months may be unknowable or just plain bad, but the economy has always recovered eventually, and share prices appear cheap compared with business prospects over the long haul. “What history has shown is that when investors have endured that sort of pain, returns can be well above historic norms,” Mr. Richardson said. To help limit further pain, he prefers stocks of companies that have high dividend yields and enough cash on hand to get by without having to raise capital in the markets.
Mr. Tankersley encourages long-term investors to take a chance on stocks— delicately, by putting in cash when the S&P 500 dips. “If you’re someone with a longer horizon, I think you can start picking away here,” he said. One sector he has warmed to recently is financials. “I’m disposed toward bullishness there,” he said. “It’s well worth someone’s time to investigate who the winners will be” once stability returns to the industry.
Mr. Sri-Kumar also recommends buying stocks only gradually. He would allocate twenty percent of cash available for investment now and increase the exposure if the market heads back toward the March low, which he predicts. The lingering caution among the public seems about right to him. “Start entering the stock market now but don’t get ecstatic and think the rally is going to pass you by,” he said. “I still think there will be a lot of opportunities for the little investor to get in.”

Rico says his pitifully tiny portfolio (a few shares of Apple Computer) have bucked the trend, but he ain't getting rich off that...