You Need to Be in the Game to Win

Timing the rebound from a bear market is nearly impossible, so steady buying is a better bet.

By Melissa S. Bristow, Managing Editor, the Kiplinger letters

July 23, 2008

Investors risk panic or paralysis in today’s economic and financial climate of widespread gloom punctuated by periodic glimmers of hope. The stock market is clearly in bear market territory since the benchmark Standard & Poor’s 500 recently joined other indexes in a 20% decline from its October 2007 peak. Many folks might be tempted to throw in the towel, but it’s not the time to sell U.S. stocks.

Those who have been buying -- through dollar cost averaging in contributions to 401(k) accounts or otherwise -- should keep it up. In fact, anyone who has extra cash that won’t be needed for at least three years should buy more stocks.

Why? For one thing, the alternatives are poor. Returns on cash are very low and bonds, especially U.S. Treasuries. are overvalued. For investors seeking a safe yield, municipal bonds are the more attractive option.

Foreign stocks are relatively more expensive than their domestic counterparts, and real estate, usually a safe place to stash your cash, will remain bogged down for the near future. As for commodities, most of them are at least fully priced; some are way overpriced.

At today’s depressed prices, stocks are alluring. With the S&P 500 price-earnings ratio at about 14 to15 for the 2008 calendar year, shares in many companies are considerably undervalued by historical standards. What’s more, the earnings outlook is turning more positive: After dropping nearly 6% in 2007, earnings should grow about 5% this year and much more than that in 2009.

Many companies’ shares have been unfairly battered in recent months. The list includes banks, such as Zions, M&T and BB&T, that are fundamentally sound but were caught up in the market tumble. Other firms that seem to fit the bill: American Express, Verizon, United Technologies and 3M. Also on the short list of companies that shouldn’t be shorted: retailers Coach and Bed Bath & Beyond plus giant fishing and outdoors merchandiser Cabela’s.

Health stocks, too, are a smart value. Pharmaceuticals have been pummeled by patent expirations, the scarcity of new megadrugs and increased regulatory scrutiny. Chemical firms and independent refiners, such as Valero Energy, also look mighty good as crude oil prices continue to slide, easing the squeeze on margins such firms have faced.

But there’s a second good reason to stick with stocks, despite the volatility that has scared many investors away. It’s in just such bear markets that the foundations of future gains are laid.

No one knows what the next six months will bring. The market may fall further. It may not. What we do know is that the rebound from the bottom is usually steep and can be sudden. In the past nine bear markets, stocks dropped an average of 12 additional percentage points after crossing the 20% threshold into bear territory. Seven times, the S&P rebounded to the 20% mark within a year. Four times, the S&P regained the peak inside a year.

Buying on the way down ensures that you’ll catch the big bounce up.

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