In You Win, Out You Lose, Says Stock Strategist

Charlie Brown once lamented: "I have a feeling when my ship comes in, I'll be at the airport."

Sam Stovall, the chief investment strategist of Standard & Poor's, addresses himself to Charlie Brown's complaint, declaring there's a real risk that many investors could join him at the airport.

He elaborates on this fear in a book he's written that's just off the press, The Seven Rules of Wall Street. What makes one of those rules so relevant right now--namely missing a likely impending surge in stock prices--is that it provides an especially timely insight into the 16 bear markets (declines of 20% or more) that have occurred since 1929.

The latest, which ran from October 9, 2007, through March 9 of 2009, a period in which the S&P 500 dived 57%, was the worst since 1929-1932 crash when the index was smashed with an 86% loss.

What he's trying to convey to investors, Stovall tells me, is "don't be a Charlie Brown and be at the airport by being in cash now that your ship is pulling in and the market has turned around." Or put another way, as he sees it, the bear market is over -- so don't run for the hills and miss the surge after the slump.

Sounds promising, but the idea of asking investors to become more aggressive and less timid may be asking for the impossible since most of them have been butchered and are understandably fed up with the market--so much so that many are no doubt thinking of dumping what little shares they have left and swearing off equities forever.

A dumb thing to do! That's essentially Stovall's thinking, based on a probing analysis of the 16 bear markets, which finds, on average, that the recoveries are fast and furious. For example, one third of a bear market loss is usually recouped in only 40 days, while more than 82% of the loss is generally recovered in the first year of an ensuing bull market. In that first year of recovery, the S&P 500 has risen an average 46%.

What's more, if an investor is the patient type, typically their portfolio will get back to break-even in a little more than 5 years after the bear market is over.

Stovall acknowledges there's no way he can guarantee the market will respond the same way this time around, but if you go by the odds, he says, the odds strongly favor a surge.

Is that supposed to mean it's now up, up and way for the market? No! Though bullish for the long run, Stovall sees the near term (the next three months) producing more pain, on the order of about a 10% to 15% decline. Why so? Because, he notes, every recovery in stock prices following bear markets dating back 1932 has undergone a subsequent correction that averaged 10% and an even larger 15% following mega-meltdown in excess of 40%.

Accordingly, Stovall thinks chances are that the recovery rally of 40% in the S&P 500 from March 9 of 2009 through June 12 of 2009 will likely experience a 10% to 15% correction, pushing down the index to about 825 from its current level of around 920.

Despite this expected decline, though, Stovall still sees money-making prospects for the nimble investor. He notes, for example, that post bull market corrections that follow rallies after bear markets are short in duration, generally lasting one or two months.

His strategy during such periods of brief declines is to go defensive, namely focus on stocks in such defensive-area sectors as consumer discretionary, health care and utilities. In these areas, he favors for the nimble investor a trio of companies with above-average ability to raise earnings and dividends and which currently offer a payout in excess of 3%. They are Altria, Johnson & Johnson and Oneok, a gas utility in Oklahoma.

Comments

[dmyron]

Retirement "after the crash" has been sobering. "On paper" has a whole new meaning. To Wall Street :
don't call don't write.....­....

[dmyron]

"on paper"- maybe a loose reference to "litter box"?

[research]

not till the market is properly regulated.

[rcampbell]

I sold a business a few years ago and am living on the interest and dividend income my portfolio produces. After about a 30% decline, my portfolio is now less than 1% different from what it was at the end of last October. I have friends who pulled their money out in October. I see two big drawbacks to their action. One is they can't figure out when to get back in and may therefore lose out on some of the upside as the economy and market improve--which it will without doubt. The second is that by pulling out so quickly last fall, they locked in capital gains made ealier in the year without getting the benefit of off-setting losses that occurred in the last quarter. I got back all my quarterly tax payments and with the carry over of those loses I will most likely pay no taxes for 2009 either. Being out of the market isn't a foolish strategy, it's no strategy for the future of your money.

[audadvnc]

Loosely translated:

"Wall Street thanks you - We cleaned out your savings and retirements. Got anything else? Money in the mattress, perhaps?"

[bayviking]

The US Treasury and everyone's 401Ks have been looted. Forget average comparisons. The only valid comparison is 1929. From this an entirely different set of conclusions would be drawn. Most notably, don't go near the market until the laws which prevented fraud and market manipulations are restored. But, at least he used a 5 year window.

[TrollDiddy]

Your advice pales in comparison to Dan Solin across the other side of this website. Try again?

[illinoisan]

This is the low in "buy low".