As long as the market keeps tumbling, investors aren't likely to absorb any positive news they imbibe. And that itself could prove a danger to the economy, frets National Association of Manufacturers President Jerry Jasinowksi. "Further drops in the market could sour consumer sentiment more and lead to continued softening in consumer spending," he warns. "There is real danger the market signals could become a self-fulfilling prophecy."
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Unfortunately, this is how the yin and yang of bull and bear markets works: The seeds of the next trend are contained in the excesses of the current one. This time, irrational exuberance gave way to irrational pessimism. It's not a pretty process. "A lot of sins get revealed during a bear market and the bodies come floating up to the surface in the most unexpected places," says Charles Albers, co-manager of the Oppenheimer Main Street Growth & Income fund. Places such as Houston (Enron), Clinton, Miss. (WorldCom), and Coudersport, Pa. (Adelphia Communications).
Becoming an embittered cynic about corporate scofflaws and washing your hands of stocks forever will not, however, help you retire or save for your kid's college education. Bonds have their place, but it would be tough to find a financial adviser who is telling a 30-to-50-year-old client to move 100 percent into fixed-income securities.
Timing is everything. So what to do, what to do. By some measures, including one often consulted by the Fed (box, Page 26), now might actually seem to be a great time to buy stocks--or at least one in which there seems to be more upside than downside risk in doing so. Edward Yardeni, chief investment strategist at Prudential Securities, says his analysis model shows the market is 24 percent undervalued--the lowest reading since 1980. Yet he cautions that stocks "could remain cheap for a while" as investors continue to assimilate the daily barrage of accounting questions.
Assuming that we've not entered a bizarro era where stocks never go up (the evil twin of the '90s era in which stocks supposedly never went down), smart investing means continuing to include equities as a critical part of an investment strategy. But once the bear is dead, don't expect your portfolio to be pushed along by the tsunami winds of the overheated market of the 1990s. Robert Rodriguez, manager of the FPA Capital fund, calls it the "height of rear-view thinking" to extrapolate the recent past forever into the future. Rodriguez, along with many other savvy pros like Warren Buffett, says that after a diet of supersize returns in the 15 percent to 20 percent range, the market is likely to grow in the single digits for the next five years or so. Of course, wise stock picking can help, but that's hard to do in an age that seemingly demands that an investor be a forensic accountant or one of those crime-predicting precogs from Minority Report to spot firms whose chieftains are as likely to be featured on Court TV as on CNBC.
One possible source of useful guidance is quantitative portfolio managers like Columbia Partners' von Pentz and Oppenheimer's Albers. Quant managers are nearly pure numbers guys. They invest using computer models that feed on company data. They rarely tour company headquarters or chat it up with CEOs like most other portfolio managers. And that's pretty much the situation most investors find themselves in.
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