NEW YORK (CNN/Money) -
Autumn will soon be upon us. And along with falling leaves, football and mediocre new network television shows (John Ritter is back in prime time...oy), the change of seasons might also bring hope that the markets are finally in full-blown recovery phase.
After hitting new lows in late July, the markets bounced back sharply. The Dow is up 12.5 percent since July 23 and the S&P 500 has gained 15 percent. That's led some to believe that the worst is finally over. Still, investors shouldn't get too excited. Barring a gigantic rally, the market is on track to suffer its first three-year stretch of declines since the beginning of World War II (1939-1941)
* As of August 30 | Source: CNN/Money |
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Based on closing prices from Aug. 30, the Dow would have to gain 15.7 percent by the end of the year to break even. The S&P 500 would need to soar 25.3 percent to avoid a loss. And the Nasdaq? It would need to shoot up a staggering 48 percent to stay out of the red.
Only six of the components of the Dow are up year to date (American Express, Coca-Cola, Eastman Kodak, 3M, Philip Morris and Procter & Gamble) For a look at how much some of the worst performing stocks in the Dow must gain in order to break even, check out the chart at the right.
Not surprisingly, the tech and telecom companies have the most work to do. Baby Bell SBC Communications would have to gain nearly 52 percent to break even while semiconductor leader Intel would have to soar more than 83 percent. The recent spate of bad news from companies like BellSouth, Sun Microsystems, and Novellus Systems doesn't bode well.
September is scary
Here's another worrisome fact. September is typically one of the worst for stocks. During the past 25 years, the Dow has fallen 19 times in September. There really isn't a clear cut reason to explain why this has been the case (after all third quarter earnings season isn't until October) but the numbers don't lie.
Wendell Perkins, manager of the Johnson Family Small Cap Value and Johnson Family Large Cap Value funds, fears that this September could be tough for stocks as well. He says that the economic and earnings outlook is still murky. So it's reasonable to expect investors to take profits in September. He thinks that the major indexes could even slide back towards their July lows.
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Coping with the bear
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"We're just not seeing the turn in economy that people want to see yet," he says. "Had the market not recovered so quickly in August, maybe you could argue that September would be immune from the normal downturn. But they bounced back so quickly."
Still, major market moves following Labor Day are not unprecedented either. The summer of 1998 was a tumultuous time, with crises in Russia and Latin America as well as the collapse of the hedge fund Long-Term Capital Management. Heading into September, the three major market barometers were all sitting on year-to-date losses and investors were consumed with fears about a global recession.
But thanks to three interest rate cuts by the Federal Reserve that fall, the Dow surged 21.8 percent, the S&P shot up 28.4 percent and the Nasdaq soared 46.3 percent and all three wound up with gains for the year. A year later, technology stocks made a similarly big move during the last four months of the year, with the Nasdaq rising 48.6 percent after a choppy summer.
Of course, the environment is much different now. The economy was incredibly strong in 1998 and 1999. In hindsight, those big gains are universally recognized as vestiges of the market bubble. So even if the market continues its rally, further gains are likely to be more muted.
"The market is not going to go straight up. It could be two steps forward and one step back for the next few months," says John Lynch, chief market analyst for mutual fund company Evergreen Investments.
Lynch thinks that market conditions are starting to return to normal. He says the fact that growth stocks and large caps have done well lately is a sign that the market isn't as concerned about another economic slowdown since these are the types of stocks that perform well in a recovery. He adds however that investors need to have more reasonable (i.e. lower) expectations for earnings growth and stock market performance than they grew accustomed to during the bull market.
"After extremes on the upside and extremes on the downside, and given what I expect to be a slow growth recovery, investors should embrace consistent high single digit earnings growth," Lynch says.
That may not sound terribly exciting but it's better than more earnings declines.
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