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Bad Enough

By Arnie Kaufman Valuations don't necessarily have to fall further and investors don't have to endure more pain before the market can begin to recover. Justification for higher-than-average p-e ratios exists in today's low inflation and interest rates, as well as in the prospect of a strongly positive rate of change in profits in the period ahead. Confidence, another key element in valuations, should improve as financial reporting becomes more transparent and reliable.

Unlike recessions, bear and bull markets aren't given official starting and ending dates. Using simply the 20% test can be misleading. The 21% gain in the S&P 500 in the 31/2 months from September 21, 2001 to January 4, 2002, recouping little more than a third of the loss over the preceding 18 months, hardly deserves a bull market designation. Thus, we'd regard the bear market that began in March 2000 as being in effect up to this point, making it a 28-month, 45% decline -- exceeded in duration since World War II only by the 36-month-long drop in 1946 to 1949 and in degree only by the 1973-74 slide of 48%.

The S&P is down 26% this year alone. It fell 20% or more in a calendar year only once since 1937, that being the 30% plunge in 1974. If the "500" ends in minus territory for 2002, it would mark the first time it declined three years in a row since 1939 to 1941.

The sentiment indicators reflect this long, deep and recently accelerated decline. Investors increasingly have been giving up on the market. One sign of capitulation is the recent selling of stocks that had been holding up well even as most others were falling.

We believe a decent bounce is close. Some testing of buyers' conviction would be expected to follow any rally. But if institutions get on board, a sustainable advance may then develop. Institutional support would be indicated when volume on stocks that post gains exceeds that on decliners. Kaufman is editor of Standard & Poor's weekly investing newsletter, The Outlook

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