History shows market volatility can last decades

Posted: Friday, November 15, 2002

NEW YORK (AP) -- OK, time for a little reality check. You've lost $25,000 in the terrible bear market, but just maybe the worst is over, so you can sit back and watch your stocks go up, up and away again.


History tells a much different story.

Stocks can get stuck in a volatile trading range for weeks, months and possibly years, often making big swings in either direction and ending up pretty much where they started. That means it might take a very long while for investors to see any big gains in their portfolios.

''Just because you cut your teeth in the market over the last few years doesn't mean that you will start seeing dramatic positive returns again anytime soon,'' said Kevin Gaughan, portfolio manager and equity strategist at Strong Financial Corp. in Milwaukee.

During the 1990s, a lot of people were smitten with investing for the first time.

Some jumped in because they simply couldn't resist the big gains being tallied on Wall Street. Others got involved thanks to the company retirement plans like 401(k)s, which let employees invest part of their paychecks in financial markets.

Their holdings surged to astonishing levels. Could the good times ever end?

Not only did they end, they crashed. The big money investors earned -- which was mostly accounted for only on paper -- has vanished in a crippling downslide that's lasted almost three years.

Now there's some hope, though nothing definitive, that the bear market is over.

Since early October, there's been a healthy stock rally fueled by some positive earnings news.

The Dow Jones industrial average has surged about 17 percent from its five-year low reached Oct. 9. During the same period of time, both the Nasdaq and the Standard & Poor's 500 index have jumped from their six-year lows. The Nasdaq is up 22 percent and the S&P is up about 15 percent.

These gains sure look good. They feel good too, especially for those who have been terribly beaten up by the market's recent tumble.

But investors, especially those new to the game, need to understand how Wall Street works.

''Investors can be seduced ... into a market full of false rallies,'' said Alan Ackerman, executive vice president at Fahnestock & Co.

Even if the bear market is indeed over, that doesn't guarantee stocks will rocket higher and stay there. The market could get caught in a cycle of trendless volatility, where prices just keep going up and down and the end result of the swings isn't much.

At least that's what history shows. Take a look at what happened from 1960 to 1982, a 22-year period when the Dow industrials were caught in a tight trading range between 550 and 1,000.

There were six bull markets during that time with an average gain of 52 percent, and six bear markets during the same span with an average loss of 26 percent, according to Edward Yardeni, chief investment officer at Prudential Financial in New York.

On Nov. 14, 1972, the Dow topped 1,000 for the first time, but that surge didn't last long. And it took until December of 1982 to move above 1,000 again and stay there for good, according to the Stock Trader's Almanac.

No one's thinking that trendless volatility will linger in the market for another two decades. But Yardeni and others say that it could hang around at least through next year.

That's because there aren't enough factors pushing the market forward and keeping it there. There are still concerns about the economy and its impact on corporate earnings.

We are already seeing these kinds of swings. Just look what's happened since last spring.

The financial markets collapsed from already depressed levels in May through mid-July and then rallied sharply higher. But by late August, a damaging selloff again set in and lasted through early October. Now stocks are climbing again.

Get used to it, and just follow the bouncing market.


Rachel Beck is the national business columnist for The Associated Press. Write to her at rbeck(at)ap.org

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