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The Bulls and the Bears

Stock Market News

August 2002

The Bulls and the Bears

We are in the midst of a dire bear market. What ought investors do about it? It depends on who the investors are.

For some, the panic selling that we witnessed during July may be the appropriate reaction. Those investors are on margin (they borrowed money to invest) or are otherwise heavily indebted; they know little or nothing about our economy or our markets; they believe that how the market performs in the short-run is all that matters; they need to raise cash to fund daily expenses; or finally, they have no long-term investment plan in place to guide their decisions.

For others, a measured reaction seems appropriate. These investors are staying focused on their asset allocation; they make sure they have cash and short-term bonds to cover planned spending and/or contingencies; they monitor long-term trends in the economy and make adjustments as new information becomes available; and, they sell securities when the outlook for those securities warrants it.

July was definitely a two-faced market. Relentless selling hit the market early and often. What made July tougher than other months of this bear market was the fact that the very stocks that were the beacons of hope and strength began to crumble. The best performers were among the hardest hit as some investors scrambled to raise cash from their winners. This heavy pressure piled more misery on top of already shaky investors.

Remarkably, though, near the end of the month, the market got a huge surge of buying. The trigger? It would seem that two factors caused a sharp reversal in the supply and demand equation. First, some high profile executives were seen on television being carted off wearing the matching set of shiny chrome bracelets. In that instance, it was the Rigases being arrested for defrauding investors in Adelphia, the once dominant cable company. The sight of justice prevailing apparently warmed the hearts of investors everywhere. The second factor was likely rumors that the Federal Reserve Bank’s FOMC may have been meeting in secret (or would be) to discuss ways of providing more liquidity to the markets.

Whatever the factors were that resulted in the aggressive buying during the last few trading sessions of July, one point was driven home: If you attempt to sell while waiting for the bottom to come before you get back in, you’re doomed! The market bolted ahead 13% in a few days, with the Dow gaining almost 900 points in two sessions alone.

An interesting point to take away from the few days of giant gains was the number of pundits bemoaning the rise. No one would call this the start of a bull market. It is a sign of how truly bad sentiment is now. This is a good thing. Bottoms can only be achieved when everyone hates the market.

So, did we see a bottom last week? There is no way to tell just yet. But consider this: If the market is capable of mounting a rally like last week after being down almost 50% from its high two years ago, and after mutual fund investors pulled out $70 billion in the past month alone, what might it be capable of doing when confidence is finally restored?

Early during the Reagan Administration, significant (and, at first, painful) corporate and market reform took shape, and in 1982; a bull market was born that would last almost two decades. What might current reform mean for the next two decades? Ronald Reagan said something twenty years ago that moved a generation. He said, “It’s morning in America.” Could we say the same thing now? We’ll have to wait and see.
 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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