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‘);   E-Mail Article   Listen to Article   Printer-Friendly   3-Column Format   Translate   Share Article      Text Size So whatever became of the much-ballyhooed Fed rally? In September, investors clamored for the Federal Reserve Board to start cutting interest rates aggressively - not only to stave off a possible recession, but to give the then-faltering stock market an added lift. Historically, rate cuts have done just that. Since 1954, the Standard...

Should you buy or sell into the bailout?

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The striking ups and downs in the stock market offer something for everyone.
The blastoff in the stock market just over a week ago that carried the Dow Jones industrial average nearly 1,000 points higher over four trading hours furnished some bulls with the sign they had awaited that the trend had changed. For investors who think the glass is half empty and may contain something toxic, the cascade that followed confirmed that the rally was just another chance to dump stock.
So what do investment advisers think is the right thing to do now, buy or sell? The consensus is: neither.
Whether they are hopeful or fearful, analysts and fund managers contend that the best course of action is to hold back and wait to see what develops next. During this period of extreme volatility, that is an option that few investors seem interested in taking, but there are good reasons for bulls and bears to give it a try.
Among many unknowns, the biggest one concerns the government agency being created to take bad debt off the hands of financial-service companies. Congressional leaders announced Thursday that the broad outline of a deal had been worked out, but just a few hours later, it became clear that no agreement was at hand. And even if a bailout bill is passed, it is likely to remain unclear for months what the cost and the impact on the economy and financial system will be.
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“Transferring assets that are so difficult to price into this vehicle is not going to be easy,” Mark Schmeer, chief investment officer for global equities at MFC Global Investment Management, cautioned. “That's one of the details that might create speed bumps for the market.”
The closest thing to a precedent may be the Resolution Trust Corp., set up in 1989 to engineer an orderly disposal of real estate and paper assets from failed savings and loans. If the economy and stock market follow paths similar to what they did after the RTC was formed, buyers have good reason to hold their fire.
David Rosenberg, chief North American economist at Merrill Lynch, recalled in a note to investors that the Resolution Trust liquidations were deflationary enough to delay a trough in economic growth for two years and in the housing market for three years.
Sam Stovall, chief investment strategist at Standard & Poor's, pointed out that the agency did no favors for stocks either. Financial stocks rallied slightly in the weeks after the agency was set up, then lost nearly half their value over the next year. The broad market did better, but not well, trading sideways for 15 months.
One difference between conditions now and then is that stocks and the economic cycle were rising in 1989, not mired in long slumps, so the Resolution Trust Corp.'s value as a road map might be limited.
Even if there is more room for improvement today, it may not happen immediately. Stovall noted that bear markets often ended for good only after a low was made and then approached again and sometimes exceeded slightly.
A successful retest of a low tends to occur on lighter volume and is “less emotionally gut-wrenching,” he said. The mood at that point is closer to resignation than panic.
Stovall is reserving judgment on whether the retest will confirm a lasting low. Schmeer is more confident, in part because so few of his peers seem to be.
“There is a lot of bearish sentiment,” he said, noting that recent surveys of investment newsletter writers showed twice as many bears as bulls, an extremely rare event. Another sign of nervousness was very high readings over the summer on measures of market volatility.
Nearly universal anxiety is almost a prerequisite for a bear market bottom. It is what prompts the last sellers to bail out, clearing the way for the next rally.
Schmeer expects the low set last week to hold. Even if it doesn't, he says he is confident that the next significant move is up, although he is not sure it will be easy to get there.
“I think stocks will be materially higher a year from now,” he predicted, “but we still have tough sledding to get through.”
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