No halting market's avalanche

The bottom may be near, but timing of a recovery is anyone's guess

How much worse can it really get?

The stock market's latest plunge, the worst of seven straight daily declines, had money managers shaking their heads yesterday. The Dow Jones industrial average has lost ground in small setbacks and hair-raising plunges, like yesterday's 678.91 drop. The Dow has lost so much ground - nearly 40 percent in the last year and about half of that over the past month - it's hard to imagine having much left to give.

Of course, stocks can, and very well may, go down more from here. Another 600-point slap in the head isn't out of the question. And President Bush's plan to assure the country in remarks from the Rose Garden this morning isn't very assuring.

But believe it or not, there are reasons to think stocks are approaching prices that will someday be remembered as a market bottom.

The stock market's grim decline looks a lot like past bear markets, and the comparison offers some reasons for hope. The amount of money lost in stocks and the length of the decline are on a scale that resembles those previous bear markets. Stock prices, based on many standard measures, have been beaten to values that would normally be seen as bargains.

That doesn't mean stocks will recover quickly or dramatically. But it would feel good just to stop losing money. Sideways is the new up.

The unfolding financial crisis shaking world markets is hard to comprehend, let alone predict. This collapse is just so different - from our inability to know just how much bad credit lurks around the world, to its resistance to any remedy so far - that a truly terrible economic consequence isn't out of the question. All stock market bets would be off in that case.

Right now, the impenetrable complexity of the financial crisis has helped spark the kind of investor panic that can make short-term predictions look silly.

"The market hates uncertainty, and there's not a lot of confidence in the things being said publicly," says Howard Silverblatt, a senior index analyst at Standard & Poor's. "Everything is fine and the next day it's not. It's beyond the control of corporations and the question is whether it's beyond the control of governments. That's the stage we're at now."

All true. But take a moment to think about this: Stocks are near points that resemble the bottom of other serious bear markets.

For one thing, the current bear market hit its one-year anniversary yesterday. That's a long time to be losing money, but nothing out of the ordinary when markets go south in a big way. Bear markets, on average, last about 15 months.

The amount of pain inflicted by the current selloff also comes close to matching the typical experience when times get tough. The average bear market, since World War II, has chopped about 40 percent off the value of stocks. At the moment, this bear has clawed 39.4 percent off the Dow Jones average and 41.9 percent off the broader S&P index of 500 stocks.

The actual amount of money lost in the stock market over the past year is staggering but - again - right in the range of comparable past experience. The overall stock market has lost more than $7 trillion of value, and most of that -more than $5 trillion -has been in stocks that make up the S&P 500. That benchmark lost $5.7 trillion during the bear market of 2000-2002, a period that followed another kind of financial bubble and included the shock of the Sept. 11, 2001, terrorist attacks.

Stocks also appear inexpensive by the most standard measures, though that advantage might not be as dramatic as it appears. The most basic measure, price-to-earnings ratio, measures a share's price in relation to the profit a company is expected to earn over the next year.

Overall, big-company stocks are trading at prices equal to about 10 times the profits companies are expected to earn next year, more than a third below long-time averages. Many trade even lower. The catch: earnings predictions are almost certainly overstated and will come down in the months ahead. Stocks are historically cheap, just not as inexpensive as they might seem.

In other words, stocks are trading as if a serious recession is underway today, though it hasn't been officially declared yet.

"A significant portion of the stock market is trading at multiples of three, four or five times earnings," says James Kaplan of Cubic Asset Management in Boston. "The market has discounted the bad event which has not yet been announced."

Stock market volatility, the kind of activity that makes most investors nauseated, is running at record levels. The VIX volatility index, often called the fear index, has tripled to new records in past two months.

The bad news: Record volatility yesterday proves just how dangerous the stock market is right now. The good news: High volatility is often an indication of the market getting ready to change direction, heading up or down.

But timing the recovery from this bear market is even harder than calling a bottom. Stocks usually start to recover from a bear market about six months before the economy pulls out of a recession.

"We could be in the midst of a bottoming process right now if the worst of the recession happens in the second quarter of 2009," says John Lynch, chief market analyst at Evergreen Investments in Boston.

Maybe not. This economic slump is different from most others - experts don't even agree whether we are in a recession right now - so predicting the start of a recovery amounts to a wild guess.

Most recessions start when rising wages cause inflation, and governments respond with higher interest rates and businesses slowly work-off excess inventories of products. That's a fairly predictable cycle, but it has no bearing on the current crisis.

Central bankers don't even seem confident they grasp the dimensions of a meltdown caused by complex securities and derivatives traded privately around the world. Who can forecast a recovery from that?

The recovery could take longer, too. Consumers led the economy back from its last setback, but the home-equity piggybank they relied upon won't do a bit of good this time.

All that makes today's stock market a particularly risky place. There are reasons to be hopeful. That said, this sure doesn't seem like the right time to get in, but it's certainly the wrong time to get out.

Steven Syre can be reached at syre@globe.com.