Business

THE BEAR ESSENTIALS

Have markets finally hit bottom? Well, it’s a process.

KATHERINE MACKLEM October 28 2002
Business

THE BEAR ESSENTIALS

Have markets finally hit bottom? Well, it’s a process.

KATHERINE MACKLEM October 28 2002

THE BEAR ESSENTIALS

Business

KATHERINE MACKLEM

Have markets finally hit bottom? Well, it’s a process.

THE EXTREMES have been more like, X-treme. The greatest bull market ever. The longest-lasting bear since the ’70s. The steepest three-day rally in 20 years on the Toronto Stock Exchange. The worst quarter on record for Canadian mutual funds, from July through September. The upswings spark optimism; the prolonged downward swoops leave investors in despair. “People are hopeful,” says a fortysomething Toronto woman whose onetime $250,000 portfolio has shrunk to $66,000, “but they are afraid to believe.” Like children on a long family road trip, investors are feeling cranky and tired. More than two years into a bear market, their destination, of course, is Bottom, and they want to know: Are we there yet?

After a hope-inspiring summer rally, stocks went back into decline. From midAugust to early October—the month feared, historically, for turbulence—the S&P/TSX composite index fell 14 per cent. But then, around the Thanksgiving weekend, markets embarked on a major climb, giving rise again to hopes that the worst was over. Yet no one knows if the market has hit bottom, and the experts aren’t very reassuring. Their collective response—“maybe”—is as satisfying as the standard parental comeback—“soon”—is for the kids.

“Bottom is a point in time only for the historians,” says David Rosenberg, chief Canadian economist and strategist for Merrill Lynch Canada Inc. “Most people don’t know we’re at bottom until probably six months to a year after it happens.”

Still, there are signs that can indicate a market’s low point—and with them comes much speculation. Some analysts look to previous bears. In the early ’70s, the decline followed a path eerily similar to the current downturn. That bear lasted almost two years, striking bottom after the S&P 500 Index had fallen nearly 50 per cent. Following the thunderous Crash of 1929, it took three years, until 1932, for the market to hit what seemed to be the floor. But then

it doubled back down again a year later to find the real basement. “Bottoming is a process,” says Rosenberg. Calling it, he adds, has a lot to do with gut feelings. It’s when players in all corners—portfolio managers, analysts, strategists, economists— share the misery. “Not just bearish, but disdain and disgust turns into despair. That’s usually one form of what we call a washout.” In other words, plain ugly.

The stock market tends to foreshadow economic conditions, says Peter Drake, deputy chief economist for the TorontoDominion Bank, and right now, it is waiting for more balanced growth in the U.S. So far, consumer spending, often in response to irresistible incentives like zero-per-cent auto financing, has fuelled

the recovery, weak as it is. Wall Street wants businesses to start spending, too. “The equity markets have a legitimate concern,” says Drake. Still, the economist thinks the pain will begin to end soon, amid gradual growth in the U.S. “We’re remarkably close to a bottom,” he says. “Problem is, that and $1.10 get you a cup of coffee. If your portfolio is down, that’s all you’re thinking about.”

One factor differentiating the last bull market from previous ones is simply the number of participants. Stocks became trendy in the late ’90s and North Americans invested in droves. Now, partly chased out by the bear, many are exiting, contributing to its strength and endurance. Every month since March, Canadians have pulled more money out of mutual funds than they’ve put in—in all, $3.7 billion—a remarkable turnaround from the solid, steady growth in deposits since 1995. In September alone, they cashed out a net $1.1 billion. This, plus the funds’ poor market performance has led to a 10.6 per cent decline in total mutual fund assets this year, to $381.1 billion at the end of September.

The undeclared war on Iraq is also acting as a drag on stocks. “Of all the things markets might hate, they hate uncertainty more than anything else,” Drake says. “Whenever you talk about military action, there is uncertainty almost by definition.” If history is a lesson, equity markets were rocky and falling in 1990 leading up to the Gulf War. As soon as the U.S. attacked in January, 1991, markets took off. A new strike on Iraq could be the factor that establishes where Bottom is. But we’ll only really see it in the rear-view mirror. fiil

THE LONG ROAD DOWN

S&P/TSX composite index (TSE 300 until May, 2002)