Never Again?

The losses keep mounting.  The week ended with a stinging 7% drop on the S&P, the worst weekly performance since early October 2008.  Year to date, the S&P is off almost 15%.

The catalyst?  Nothing in particular.  The data were weak–as usual–but perhaps investors are starting to realize (and price in) that a second half recovery in earnings may not happen.   Perhaps folks are fearing that this recession, as Paul Volcker suggested, is not your ordinary, run-of-the-mill recession.

The data (housing starts & permits, industrial production, and Philly Fed) continue to point to seriously weakening demand.  Inflation numbers jumped slightly–due mainly to gasoline price hikes–but nobody believes that this reflects the price increases normally associated with economic recoveries.

Corporate earnings and outlooks continued to disappoint, with HP, Deere, Comcast, XTO, Lowes, and many others reporting below expectations.

The Wall Street Journal this week made an interesting point about the mindset of long-term investors and their supposed hoards of cash, sitting on the sidelines just waiting to rush back into stocks when things get better.  If stock market losses continue to get worse, and if the losses don’t reverse themselves fairly quickly, then investors might not be willing to jump back in–for a long time.

In fact, the percentage of cash as a share of market value has jumped, but it’s jumped up to levels that are merely consistent with long term averages.  In other word, the growing piles of cash are reverting back to normal amounts, not relatively high amounts.

Today, with the S&P500 off almost 51% from peak, who can blame investors for losing faith in the markets?  Certainly, it’s becoming harder to swallow the argument (peddled primarily by the mutual fund industry) that stocks are always a must-have asset class, an asset class that should soak up a huge chunk of your capital.   Instead, investing in stocks may feel more like gambling–very much like people felt about stocks for decades after the Great Depression.

The good news?  Well if stocks did fall another 50%, to about 75% off peak (near to–but not quite–Great Depression levels), then investors could be offered the opportunity of a lifetime. 

The bad news?  Many investors will never dare to buy another stock again.

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