Home > Market Commentary

                                                                          2008

                                                                     2nd Quarter

                                                                     Bear Market

                                                             How Long Could It Last?

The stock market ended the second quarter just above bear market territory. (A bear market being defined as a drop of 20 percent or more from the previous high.) The Dow Jones Industrial Average lost 912.88 points or 7.4% for the quarter to close at 11,350.01 and was down 19.9% from its

October 2007 record close. It was also the third straight quarterly decline and the worst second quarter decline since 2002. As of this writing, the Dow and the majority of major indices have now entered bear market territory.

Stock prices are now below the previous lows established earlier in the year. The low points occurred in January and March during periods of high stress related to the subprime/housing crisis and the related ensuing credit crisis. At that time, oil prices were escalating as well, but in the $90 to $100 range versus the $140+ per barrel recently. While the worst of the credit crisis may be over, the parabolic rise in oil prices is having a detrimental affect on stock prices. As a consequence, stock prices may yet need to fall further in order to establish a new floor before starting a new uptrend.

With the market now labeled a bear market, what can we expect?

Based on historical patterns of bear markets, the current slide may have some ways to go before it plays out. The Dow experienced 11 prior bear markets since 1962, according to Westport Connecticut-based research firm Birinyi Associates Inc.  Declines averaged 29 percent and lasted 322 days. The biggest decline was a 45 percent drop over a 694 day period from January 1973 to December 1974. The Dow's worst bear market occurred in the early years of the Great Depression, stretching from April 17, 1930 to July 8, 1932. The Dow lost 86 percent of its value in that period falling from 294.07 to a bottom of 41.22.

The question now is how long will this new bear market last? According to a report by Morgan Stanley titled ‘How Long Will This Bear Market Last?', economist Chetan Ahya is of the view that macro fundamentals could take another 18 months to bottom out. Based on this, the bear market may have another 25-50 weeks to go.

According to James Stack, president of InvesTech Research, since 1926 the average bear market lasted 1.3 years. Only two of the past 15 bear markets ended in less than six months and since 1940, more than half of the bear markets have ended in less than a year. Since the Dow peaked 8 months ago, in October, we could have 4 to 10 months left before an ultimate bottom is recorded in the market.

Often in bear markets there are sharp rallies of 10-20% before the decline resumes. We had just such a rally from the end of March into the middle of May, a rally of almost 10%. As you are aware, in May we reduced our equity exposure just before the market began its current decline. In the later part of June, our indicators suggested another bottom and we reallocated the portfolios back to an approximate 70 percent equity position. This move has so far proven to be a little premature, as the market has continued to decline. However, many of the portfolios did show gains for the quarter and others lost much less than the market. We currently believe that the market has formed another bottom and should rally at least into the latter part of summer. Our portfolios are positioned to take advantage of this rally and we are prepared to exit again if and when conditions should warrant. One final note, we believe that the worst of the bear market could be behind us and by this time next year investors may look back on these times as an actual buying opportunity for equities.

As always, your questions and comments are appreciated.