While the historic plunge of the Dow Jones Industrial Average yesterday may not be a sign that the markets have reached the bottom, most economists agree that it signals a prolonged
recession.
The stock market typically begins to climb six to nine months before an economic recovery, said Robert MacIntosh, chief economist at Eaton Vance Corp. of Boston.
“It’s going to be 2010 before we get some legitimate growth in the economy,” he said.
The Dow yesterday dropped 4.2% to 6,763.29, which was the lowest level since April 1997. The index has lost more than half of its value since its peak in October 2007.
“It’s signaling that there is no magic box of bullets to fix the problem we’re in,” Mr. MacIntosh said. “It’s also clear to folks that it’s not just a U.S. or U.K. phenomenon; it’s a global
recession.”
Andy Brooks, vice president and head of U.S. equity trading at the Baltimore-based
T. Rowe Price Group Inc., noted that investors are obviously not optimistic about stocks.
“No one sees light at the end of the tunnel,” he said. “I’m waiting for the headlines, ‘Equities are dead.’”
A turnaround will take time, and that might not be until 2010 or 2011, Mr. Brooks added.
Government intervention is having a negative impact, said John Carey, portfolio manager of The Pioneer Fund (PIODX), the Pioneer Equity Income Fund (PEQIX) and other
separately managed accounts offered by Pioneer Investments of Boston. All told, Mr. Carey manages about $8 billion in assets.
“The outgoing government and the new administration have not been very helpful and have not instilled a lot of confidence,” he said. “They have presented this as a desperate situation and have made things worse by focusing so much on the negatives.”
The government is also adding an element of political risk to the investment world, said Harry O’Mealia, chief executive at Legg Mason Investment Counsel, a division of Baltimore-based Legg Mason Inc. that manages money for individuals, families and small institutions.
“Government is calling the shots, and that will make a difference in the [success] of companies,” he said. “That risk has a lot to do with the uncertainty in the market.”
And there is a very good chance that the markets will drop lower.
“We haven’t hit bottom yet,” said Jim Lowell, chief investment strategist for Advisor Investments of Newton, Mass., which manages $850 million in assets. “Anything can happen. The biggest risk is that the fate of the markets is in the hands of politicians, and they always have vested interests.”
Mr. MacIntosh of Eaton Vance added that the downturn still provides investment opportunities. “People may look back on this event and say it was a great time to buy, he said. “I wouldn’t throw everything in the stock market today, but maybe a little if you had something on the sidelines.”
Stocks are pretty cheap, said
T. Rowe Price’s Mr. Brooks. “The key is to make sure you have some ammunition to buy some of these companies between now and when we see the bottom.”
