EVERY NOW and then, the stock market gives us a thrilling, one-day rally. So, whazzup? You've got one of two possibilities.
Maybe the bear is finally rolling over. In their hearts, stocks want to rise.
Or maybe it's just a bear-market rally - also known as a "sucker's rally." Stocks rise by enough to tempt you to reinvest, then they dive back down. Bear markets don't end until the last trusting souls throw their last dollars in.
To decide which view to take, I turned to my favorite book on stocks: "Where Are the Customers' Yachts?" by Fred Schwed Jr., published in 1940 and still in print.
An old story has a hick admiring the bankers' and stockbrokers' yachts, riding high in New York Harbor. "And where," he asks naively, "are the customers' yachts?"
Schwed swiped that joke for the title of his hilarious screed on the brokerage ("quote-and-fib") business. His investment advice runs like this:
"When there is a stock-market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them. ... No doubt the stocks you sold will go higher. Pay no attention to this - just wait for the [recession], which will come sooner or later. When this [recession] - or panic - becomes a national catastrophe ... buy back the stocks. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you'll have the pleasure of dying rich."
In real life, it seems almost impossible to follow Fred Schwed's excellent advice. It means selling stocks when other people are bragging about the money they've made, and buying stocks when business looks lousy (but secretly has passed the worst).
So how bad are things, anyway? Not serious, in the majority view. "The slowdown was sharper than we forecast," says economist Ben Herzon of Macroeconomic Advisers in St. Louis. "But if final sales keep growing at current rates, it's just temporary."
The first quarter looked pretty good: consumer spending picked up; home sales were strong. Unemployment is rising, but that's typical of a slowdown's latter stage.
Other economists think it could be a year before business is up and running again. They see post-bubble risks - the global slowdown, too little consumer saving, too much debt, California's electricity shortage and the stock-market terrors shaking folks who owned techs wall-to-wall in their retirement funds.
Technically, the economy may skirt recession (defined as at least two consecutive quarters of decline), but "it's the change from high growth to lower growth that counts," says Allen Sinai, chief global economist for Primark Decision Economics in New York. "In the months ahead, it's going to feel more like a recession than it does today."
Back to the question - is the panic running high enough so that you should start buying stocks? "Yes," says economist Irwin Kellner of Hofstra University. "Every time the Federal Reserve has cut interest rates by this much, this quickly, stocks have gone up." What's more, further rate cuts lie ahead - maybe as much as 1 percentage point. What else are you waiting for?
If following Fred Schwed would leave you pale, yet you're holding a hot stash of cash, consider investing gradually - a bit per month, over the next few months. Assuming that stocks bottom and rise within that span of time, you'd get an average price without having to worry where the low point is.
Steady investors with 401(k)s should keep plugging away. Since World War II, stocks have averaged a return of 12.7 percent a year. You've gotten higher returns since 1990 (14.5 percent) and might get subpar returns in the decade ahead. But long-term, well-diversified buyers will do fine.
A harder question is which stocks to buy when you're looking for something other than mutual funds. On the Nasdaq, consider Qubes (ticker symbol: QQQ). A Qube trades like any other stock but it is not a separate company. Instead, Qubes track the index price of Nasdaq's top 100 stocks. That makes QQQ the easiest way of betting on a rebound.
Picking companies is another matter. Baruch Lev, professor of accounting and finance at New York University, says that individuals should make sector bets.
Pick an industry you think might outperform, then undertake an old-fashioned analysis of each promising company's financials, management and R&D.;
If you can't do the heavy lifting, he says, stick with index mutual funds.