How Bad So Far, & What's Next?

The chart below shows three of the worst equity bear markets in history, along with the current decline, based on the number of trading days from the top. Clearly the current bear is a bit of a baby by comparison in terms of time, but in terms of magnitude it is tracking very much in line with the dot-com bust of the Nasdaq, the collapse of the Dow during the Depression and the decline of the Rising Sun through the 1990s.

Note that all these major bear markets had some very strong periods on the way down, and most of the damage was done in the first three years. We are less than a year and a half into the current downturn in the stock market. With earnings expectations for the S&P 500 collapsing, we could be in for significantly more pain.

In general, the stock market tends to find a bottom about six months before the economy recovers. So to be aggressive in U.S. stocks here one has to assume a second half economic recovery. While the big economic stimulus plan should help a bit, hope that the economy will be starting to recover this summer seems extremely optimistic to me.

Historically we have been led out of recessions by strong growth in residential construction and in durable goods like Autos.  I seriously doubt that we will see housing construction booming in the second half of this year, nor do I expect happy days to come back again that soon for Detroit.

Stick with defensive companies like Colgate (CL - Analyst Report) and Johnson & Johnson (JNJ - Analyst Report) and avoid anything economically sensitive.



Read the full analyst report on CL

Read the full analyst report on JNJ