Powerful rallies mark bear market

The Baltimore Sun

A416-point stock market rally Tuesday seemed to rescue investors from the bear's claws, but they have to wonder if the beast is gone for good.

Many analysts aren't sure the surge was anything more than one of the powerful rallies that often come during bear markets, only to see stocks turn down again.

Last week's rally was set off by an innovative move by the Federal Reserve to relieve some of the tensions on lenders and get money flowing to borrowers by letting lenders use distressed mortgage-related bonds as collateral for loans from the Fed.

But stocks remain well below their record highs; a common view is that a recession is now unavoidable and the bear market has not run its course.

"They still have not resolved the defaults and delinquencies in housing," said Tom Atteberry, manager of the FPA New Income fund. "All of that is a full 2008 event, maybe into 2009."

Atteberry said the Fed "took some of the near-term fear" out of the financial system, "but there will still be defaults." Lenders will continue to wonder: "Do I get paid, and what loans will I have to forgive?"

Despite more than $150 billion in write-downs that companies have taken on bad mortgages and mortgage-related securities, the expectation is that financial problems are far from over. Goldman Sachs economist Jan Hatzius is estimating that losses will ultimately total $400 billion.

For investors clinging to last week's rally for a sign of hope, Atteberry delivers some bad news: The economy must go through the painful process of losses, after years of too much leverage - or spending and investing with tremendous levels of borrowed money.

Still, that doesn't mean the stock market will "remain in the super-depressed land," for years, notes market historian and strategist Steve Leuthold, founder of the Leuthold Group. "In a free economy, the cycles of expansions and contractions are as inevitable as greed and fear."

As news of write-downs trickle out, investors are expected to remain nervous, unsure about the extent of unwelcome surprises in the banking system, or the effect they will have on banks' willingness to lend money.

But by the time the economy looks the most bleak, Leuthold said, the stock market will start to come out of its funk, if history is a guide.

Currently, economists are reading the signs that the economy is entering a recession.

The most recent job market data "leave little doubt that the economy is in a recession," Goldman's Hatzius said. In addition, he sees further weakness as consumer spending remains sluggish and job losses spread.

Last week, the retailer that seemed most resilient was Wal-Mart, as analysts speculated that financially stressed consumers are "trading down," or shopping for cheaper merchandise than they normally do.

Consumers are hurting on two fronts, according to Merrill Lynch economist David Rosenberg. They are losing on their homes, as prices have dropped 10 percent on a national basis and more than 20 percent in a few markets. On top of that, they see their portfolios shrink. Household net worth collapsed $530 billion in the latest quarter, he said.

Investors looking for a soothing message could have trouble finding it.

Still, market strategists are reminding investors that bear markets are a normal part of investing and that this one, too, will end.

gmarksjarvis@tribune.com

You can leave a message for Gail MarksJarvis at 312-222-4264.

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