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When will market slide reach bottom?

Dow, S&P still remain above bear market threshold despite plunge

(NEW YORK) Recession may well be here, given the dismal February employment report last Friday. But on Wall Street, many investors still are having a hard time deciding how worried they should be.

The Dow Jones industrial average slid 146.70 points, or 1.2 per cent, to 11,893.69 for the day, falling through the low of 11,971 it set on Jan 22 and finishing at its weakest point in 17 months.

Yet, by the classic measure of a bear market – a drop of at least 20 per cent in share prices – the Dow is a holdout: It is down 16 per cent from its record high reached in October.

The broader Standard & Poor’s 500 index also remains above the bear- market threshold, despite mounting evidence of recession. It has lost 17.4 per cent from its October peak.

These numbers are handy enough for gauging the damage done. But what every investor would like to know is: How much worse will it get? If you figure that a 17.4 per cent drop in the S&P 500 is just a prelude to a loss of 40 per cent by the time the market’s sell-off has run its course, you might well opt to take some money off the table and wait it out.

You know what you’re going to hear from much of Wall Street at a time like this.

Brenton Luce, a portfolio manager at hedge fund Lakefront Partners in Cleveland, writes on his blog that investment pros’ usual advice to clients in down markets is to ‘stay long-term focused’. That, he notes, ‘is code for ‘Yes, we have lost you a bunch of money lately. But we hope that the market turns positive soon and we hope that you stick with us until this happens’.’

It wouldn’t be surprising if the blue-chip stocks in the Dow and the S&P 500 were the last refuge for investors who have given up on other sectors of the market. Smaller stocks, for example, now are in bear-market territory, with the Russell 2,000 index of small-company issues off 22.9 per cent from its all-time high set in July.

Still, you might have expected a lot worse, given the trauma in the financial system from the housing bust and its collateral damage.

The credit crunch stemming from banks’ massive losses on delinquent home loans is showing few signs of un-crunching. Money remains very tight, and money is what financial markets need to move up.

The stock market’s slide last week was fuelled in part by worries about Fannie Mae and Freddie Mac, the two government- sponsored mortgage- finance giants that are supposed to help stabilise the housing market by stepping up their purchases of home loans. The companies’ stocks fell last week to their lowest levels in 12 years, and some investors became reluctant to buy their mortgage-backed bonds, which – in theory – are of the highest-quality.

That might have been too much for the Federal Reserve to brook. Last Friday, the central bank announced a major expansion of its emergency lending programme for banks, aiming to ease the credit squeeze.

Some market pros said that investors’ mood might actually improve if Fed officials and the White House would stop talking as if recession were avoidable.

Despite the credit markets’ continued deterioration, some money managers are betting that the stock market won’t get much worse.

A bottom ‘isn’t that far away’, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. He figured that the S&P 500 could fall another 5 per cent or so, which would take it modestly over the 20 per cent loss mark.

Source: LAT-WP (Business Times 10 Mar 08)

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