On Monday, the U.S. equity markets opened sharply lower. Some said it was due to the disappointment with the Treasury bailout package that was expected to be passed.
By late morning, the Dow Jones industrial average was off more than 200 points. When the resolution was voted down in the House of Representatives, however, the market sank nearly 800 points by the end of the day. It seemed as if stocks were damned if they did and damned if they didn't.
I believe the decline early in the day was the reaction to Fortis becoming the largest European financial institution to receive a government rescue.
The late-day sell-off, in my view, was compounded by the failure of the U.S. financial-market rescue plan to be approved by Congress. As a result, investors felt as if they had been flying in the fog only to find it had gotten even foggier.
Should we be surprised by the market's performance this month?
Maybe not, since September merely lived up to its reputation as the worst month for the stock market since 1929, 1945, 1970, and 1990. The S&P 500 has posted an average decline in September whether you look back 20, 40, or 80 years.
Through Sept. 29, the S&P 500 sank 13.8%, the worst single-month decline since the Long Term Capital Management-induced panic that drove the Index down 15% in August 1998. Need we brace for more down days? Possibly.
"Say Something Encouraging"
On Monday many people called to ask, "Is there anything positive I can take away from all of this?" Yes, I tell them that it could have been a lot worse. Some said, "It's 1987 all over again!"
I reminded them that on Oct. 19, 1987, the 508-point one-day decline on the Dow represented 22.6% of its value. Today, a percent decline of this magnitude would have forced the Dow lower by 2518 points, or more than three times what we experienced. Also, today's 8.8% (106-point) decline in the S&P 500 was the second-largest decline since 1950, but well below the 248.67 points that would have been required to equal the crash on Black Monday.
Another comforting fact is that five of the last nine bear markets in the past 50 years ended in October. We enter this traditional "bottoming month" on Wednesday. Maybe we are setting ourselves up for an end-of-bear capitulation.
Since 1990, the S&P 500 has actually recorded its best monthly performance in October, as it rose an average 2.1% vs. the 0.61% average gain during all 12 months of the year. The second- and third-best performing months since 1990 were November and December, gaining 1.85% and 1.84%, respectively. Maybe we'll have something to look forward to.
And what do we make of the volatility? Mark Arbeter, S&P's chief technical strategist, believes we have already hit extreme levels of investor bearishness, as seen in recent VIX (market volatility index), put-call ratios, and investor sentiment readings.
These are typically contrary indicators and have traditionally pointed to better times ahead. My own two-month moving average of daily S&P 500 high-low percent difference has also risen. While we have not reached the level that would make me more confident of a bear market low, it is getting mighty close.
So when people ask if they should sell all of their stocks and stuff the cash into their mattress so they can sleep better at night, I say no. Besides, wouldn't it make noise when you rolled over?
Finally, I point out that with the S&P 500 now at 1106.39, the market has declined 29.3% from its Oct. 9, 2007, high of 1565.15. We have to fall to 1072.13 to reach the average decline of 31.5% for the 10 bear markets since World War II.
What's more, five bear markets fared worse than this one: 2000-02 (-49.1%), 1973-74 (-48.2%), 1968-70 (-36.1%), 1987 (-33.5%), and 1946-49 (-29.6%). In addition, the average bear market since 1946 has given back about 62% of the prior bull market's advance. This statistic held up in the 2000-02 bear market. It felt worse, however, since we went 10 years between bear markets. If we give back 62% of the 2002-07 bull market, we again arrive at the 1075 area.
History Is a Guide, but Never Gospel
While, like songwriting great Johnny Mercer, I may attempt to "accentuate the positive," I am also a realist. I acknowledge that we are in uncharted territory. Things may get worse. A lot worse. Even though the three prior mega-meltdowns (bear markets that shed more than 40%) were separated by 30 years, no one says we can't have two in the same decade.
In fact, as my friend Tom Petruno from the Los Angeles Times told me yesterday, some investors may say to themselves: "I don't want to suffer through another 49% meltdown like I did earlier this decade. I'll sell now while I still have some money."
They may also be thinking: "If this is the worst banking crisis since the 1930s, who says the stock market can't take a beating like it did in the 1930s?"
Earlier this decade, while investors in large-cap growth stocks saw their prices fall more than 60%, investors in small-cap U.S. equities, foreign stocks and REITs saw their asset values rise in excess of 100% or more. This time around, however, not only have we have just suffered through double-digit declines in all of these asset classes, but non-Treasury bonds and money markets also don't appear to offer a safe haven.
Tomorrow Is Another Day
Does this mean that I, too, think it's time to bail out of equities? No. Even though the old adage states: "If the opposite of pro is con, then the opposite of progress is Congress," I am confident that the Wall Street rescue plan is not dead. Congressional leaders will probably rework the package to satisfy both parties in the House.
If the seizure of WaMu didn't wake them up to the necessity and urgency of this bill, maybe Monday's 778-point drop in the Dow did. Besides, I am comforted that a scholar of the Great Depression is running our central bank, as I believe he is not likely to repeat the mistakes of the past.
And for those who thought the $700 billion bailout package was not enough to handle all of the bad loans on the books of troubled financial institutions, I remind them that this package is not a sponge, but a support. It is not meant to soak up all of the bad debt, but to thaw out the frozen credit markets.
Unfortunately, since the failure of the bill to pass helped cause the market to fall even further, I think it will probably take longer for stock prices to retrace their steps. Prior support levels on the S&P 500 have now become resistant levels. Many more investors will want to sell their recent purchases, once they get back to breakeven after this market has regained its footing. This "getting even" will take time to shake off the loose hands.
I don't know if Monday was the capitulation low for this bottom, but I do believe that now is not the wisest time to cash out of your equity positions. I recommend that you just sit tight.
From Standard & Poor's Equity Research.
