Jewish World Review Oct. 8, 2002 / 2 Mar-Cheshvan, 5763

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Are we experiencing the fall before the rise?


http://www.jewishworldreview.com | Wall Street gurus and pundits told us the stock market had hit the bottom in July. Now that the market has moved to new lows, they're desperately looking for any sign the bloodshed may finally be over. The best that can be said, though, is that it's hard to imagine things getting any worse.

From its peak, the Dow has lost 33 percent. The Nasdaq has fallen 76 percent. This past third quarter was the worst performance for the Dow since the stock market crash of 1987. And if you're not sufficiently depressed, consider this astonishing statistic: The Dow last month lost 12 percent - its worst September since 1937.

Nearly $7 trillion has been lost since the market's peak. The Nasdaq alone has lost more than $4 trillion. And despite the fact that the Nasdaq has a minimum $1-a-share price to remain listed, 17 percent of the stocks on the Nasdaq are now penny stocks.

Two of the three most widely held stocks still reside on the Nasdaq - Cisco Systems and Microsoft. They've fallen 90 percent and 55 percent, respectively, since the Nasdaq reached its all-time high. The most widely held stock in the country, General Electric, has fallen by more than half since early 2000.

There is so much gloom that we can look at another startling statistic as a positive of sorts.

New data from the Securities Industry Association shows that the level of outright stock ownership is slipping. Some 31.5 million Americans own individual stocks - as opposed to owning mutual funds or retirement money invested in 401(k)s. That's down from 32.8 million in 1999, and it's only 11 percent of our population.

Conventional wisdom on Wall Street (and whatever wisdom there is on Wall Street is always conventional) holds that there must be capitulation in investor sentiment - absolute investor surrender - before a bottom can be reached and a bull market can begin. Pervasive gloom, in the view of Wall Street soothsayers, is actually a positive - a sign of impending rebound. If true, the market rebound, when it comes, should be a beauty.

Liz Ann Sonders of U.S. Trust says that kind of rampant pessimism was missing during July's lows but may be evident now - a sign we're close to the bottom.

"I think we still have a ways to go, but I think we're getting there," Sonders says.

Charles Pradilla of S.G. Cowen says, "We're beginning to get a bottom, but it's not going to be a one-time thing. It may take until well into the first or even the second quarter of 2003. But, by and large, this is the bottoming process."

Pradilla predicts either high single-digit or low double-digit returns for 2003 and 2004.

But Merrill Lynch's Richard Bernstein is less optimistic: "I think that we will have reached a bottom when we stop asking that question The fact that people are still looking for a bottom pretty much tells you we're not there yet."

There are a number of disturbing signs that could signal even further weakness.

Despite the devastating sell-off of the past 2 1/2 years, stock prices are still inflated compared with historical norms, according to data from S&P's Sam Stovall, who points out that the current price-to-earnings ratio for the Standard and Poor's 500 index stands at 31.4. That's nearly double the historical average and suggests our painful period of adjustment in the markets isn't over.

As I said, it's hard to imagine things getting any worse. But as we've learned, that doesn't mean they won't.

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Lou Dobbs is the anchor and managing editor of CNN's "Lou Dobbs Moneyline." Comment by clicking here.

10/01/02:Concerns about earnings are justified
09/24/02: Business leaders must abandon stall tactics
09/17/02: Wall Street's reality check
09/12/02: There's no better time for leaders to show resolve

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