The Bottom Of This Market May Still Be Ahead

<%= article.AuthorDisplayName %>

By

Bruce Jackson

Published in Investing Strategy on 18 February 2009

World stock markets are in freefall again. The FTSE 100's November low of 3,781 is in sight, and 3,000 is not out of the question. It’s a scary, fearful time for stock market investors.

Will 21 November 2008 turn out to be the low point of this vicious bear market? The FTSE 100 closed that day at 3,781 and at that point was down 41% in the 2008 calendar year.

Today the FTSE 100 hovers around the 4,000 level. By the time you read this, it could easily be below 4,000. Heck, with markets moving so fast these days, by the time you read this, it could be below its 21 November 2008 low.

The latest leg down in the markets came about because of:

  • fears the Obama stimulus package won’t be enough to stem the recessionary tide in the US, and therefore globally;
  • fears that many of the world’s banks, particularly here in the UK and in the US, are effectively insolvent and will end up being nationalised;
  • fears that more Allen Stanford and Bernie Madoff type alleged ponzi frauds will be discovered. It’s just not cricket;
  • the realisation, slowly but surely, that the economy is not going to make a miraculous recovery in the second half of 2009; and
  • fears that the markets will head lower.

Not IF But WHEN The Market Slumps Again

There have been plenty of bears suggesting it’s not a matter of if the FTSE 100 falls below 3,781, but when.

I’m not a market timer, but I am pretty bearish on the economy. I think we’re looking out to 2010 before we’ll see any economic recovery, and even then, it’s likely to be a mild recovery. The debt-excesses of the early part of this century will take years to work their way through the system.

Stock markets do have a habit of over-shooting, both on the upside and the downside. Fearful investors, hedge funds, banks, pension funds, and life insurance companies like Legal & General (LSE: LGEN), Prudential (LSE: PRU) and Aviva (LSE: AV) can easily push the market way lower than you think it could possibly go.

It’s tough seeing the value of your portfolio and pension fund fall, day after day, month after month. Many pundits thought 2009 would see the market recover, pushing sharply higher. So far, and admittedly we’re only 6 weeks into the new year, they’ve been proven wrong.

Could the market fall below 3,781? Of course. It’s only a few hundred points off that level now, and at the rate we’re going, it could be breached by the end of this week.

FTSE 3,000? You Bet.

Could the market fall below 3,500? Of course. That’s only another 13% away.

Could the market fall below 3,000? Of course. A full-scale panic, like the one we had in October last year, where the global banking system comes under severe stress, and the very survival of banks and even countries, including ours, are questioned, could see the FTSE 100 fall below 3,000.

As somewhat of an aside, and you heard it here first, if distressed banks like Royal Bank of Scotland (LSE: RBS) and Lloyds Banking Group (LSE: LLOY) in the UK and Citigroup (NYSE: C) and Bank of America (NYSE: BOA) in the US are eventually nationalised, I think the market will react positively, and likely soar considerably higher.

The market just hates uncertainty, and right now, the will they/won’t they be nationalised debate is creating a heightened level of uncertainty and volatility over the whole stock market, and not just the banks. Nationalising them would remove a big chink of that uncertainty. As to whether they should be or will be, that’s a debate for another day.

My Investing Strategy To Cope With This Bear Market

My plan for this bear market is simple. Despite the fact that the market might fall yet further, even another 25%, I’m not selling up. As I said before, I’m no market timer, and as easily as it could slump to 3,000, the FTSE 100 could just as easily soar to 4,500. It was there on 5 January 2009, just over a month ago. It’s a reminder of how quickly these markets are moving.

I’m continuing to drip feed money into the market, happy to buy more shares as the market heads lower. It’s tough to do, but if you are disciplined and contribute regularly to a low-cost index tracker, in the medium to long-term, you should be rewarded.

Fear is a powerful emotion. It is driving the market lower, and in the case of some companies, irrationally so. There are plenty of opportunities in this market – you’ve just got to look in the right places.

Chief Motley Fool Champion Shares Analyst Maynard Paton is currently seeing some excellent opportunities in medium sized, cash-rich, dividend-paying companies. Click here to take out a 30-day trial to this premium stock picking service, and get instant access to all his very latest research and share recommendations.

In the meantime, I wish you happy, fearless investing.

More on the economy and the markets:

> The Motley Fool’s Share Dealing Service is always optimistic. Even better, it’s free, cheap and reliable. Buy and sell shares in real time for a flat rate of just £10. It’s hard to beat. Open an account for free today. There is no obligation to trade.

> Of the companies mentioned in this article, Bruce Jackson has a very small beneficial interest in Lloyds Banking Group.

Share & subscribe

Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

luke1983 18 Feb 2009 , 11:50am

I'm new to investing (very), but agree completely with Bruce that these are scary times for investors and confidence is key. Unfortunately for companies (and perhaps fortunately for investors), it's very likely that depressed sentiment will lead to some very good purchases for the disciplined investor.

I too am staying in, with a range of small regular investments in ethical tracker funds. I'm of the opinion that you shouldn't invest money you can't afford to lose and I always try keep this in mind when I see my unit trusts shooting up and crashing down!

Things may look bleak now, but there has to be a bottom at some point and I have every hope that my cheap and plentiful units may come into their own in time.

supasap 18 Feb 2009 , 12:24pm

If the FTSE falls toward a figure beginning with 3 then I am going to remortgage and invest, call me stupid but if this strategy fails then we're all doomed anyway......... have faith folks even Marx thought capitalism was very resilient and consumerism is still more powerful than any tendencies toward proletarian class consciousness which will overturn our system where we start judging each other by our quality of character and contribution to society rather than how many labels we can wear and how new our commodities are

guykguard 18 Feb 2009 , 2:05pm

Luke1983: I agree, and this is no time for lily-livered investors. I also agree that the big indexes are beginning to look relatively attractive value. Some clever clogs will do well out of the current mayhem. I'm just influenced by todays BB news that WB has reduced his holdings in J&J and P&G in favour of US treasuries.
As an amateur economic historian, I find that history has a weird habit of repeating itself. At the time of the great depression, the Index of UK security prices (base 1926=100) fell steadily from 130 in January 1929 to 64 in June 1932, a fall of about 50%. Familiar territory?
The surprising fact is that by October 1933, the index was back to 100, an increase of 56%. If history ever were to repeat itself, the FTSE 100 would fall to about 3,300 in 2012 and then recover to about 5150 in mid 2014.
Personally, I trust the numbers more than the timing. The 2008/2009 crash has been much steeper than the 1928/1929 one was. Let's hope the recovery will be, too!
I certainly think that, when the bulls begin to smell profit again, the index will be well worth watching. I've got my rain check in my back pocket.

crabbydave 18 Feb 2009 , 2:08pm

My belief is that a failure of this magnitude means that the markets have to fall at least 50% of their highs. We are nearly there but not quite.

IN the 1970s the FTSE fell around 70% I believe, in the great depression the FTSE equivalent then fell around 50% but the DOW fell 90%.

It would be foolish to call bottom yet and I am in cash only (have been for the last couple years).

There are many good shorter term trades but for longer term investors I believe the market is still too volatile and too unclear as to where it is headed.

rober09 18 Feb 2009 , 5:10pm

The nationalisation of the banks could well lead to the government having to nationalise the major insurance companies. Otherwise the loss of all the funds that insurance companies have invested in bank bonds could lead to the collapse of with profit funds, annuities, pensions etc.

If that were to happen then the banking crises would look like a minor event!!!

castath 18 Feb 2009 , 7:22pm

Bruce,

Did you not write on 4th February 2009 that this was the "Best Investing Opportunity in 35 Years".

Would you now like to retract that statement?

Clitheroekid 18 Feb 2009 , 7:25pm

The truth is that nobody has a clue.

The FTSE could quite easily drop to 3,000, 2,000 or 1,000 if a great depression takeds hold. Corporate earnings will ebb away, dividends will be cut or cancelled so P/E ratios that now look attractive will cease to apply and the new ones will look anything but attractive.

The only incentive to buy shares is the appalling return on cash thanks to `Guppy' Brown's lunatic interest rate cuts.

I'm of the Private Fraser school of economics - "We're all doomed!"

But what the hell, there are more important things in life than money, and now is the ideal opportunity to rediscover this truth.

peepobaby 18 Feb 2009 , 10:43pm

Strange to see such an article not mentioning China or Chinese fixed asset investment.

kinshaw 19 Feb 2009 , 7:36am

Do I detect a movement towards waking up and smelling the coffee?

Jbat001 19 Feb 2009 , 9:28am

Yawn.....

If you think the market is going to take another kicking, then why not short the market using a spreadbet company? You don't have to lose money in a falling market.

As for FTSE 3000 - this whole crisis has been blown up to apocalyptic proportions by the media. Yes, we probably will have to accept the international humiliation of an IMF bailout, which will then be followed by a Tory landslide and 15+ years of Conservative government. That's how these things go - remember Jim Callaghan's government? It's turning out to be true that eventually all Labour chancellors run out of money!

zeroth 19 Feb 2009 , 10:58am

The ordinary retail investor needs to remember that the final low, which may indeed be 25 % below today's level, may be very short-lived [as it was in 2003] and easily missed, unless you have previously arranged how you can invest large sums quickly. My debit card allows me to buy online up to £10,000/day. To do more I would need to talk to my bank.

A better plan is to buy into a tracker fund a fixed amount weekly or monthly, whenever the index is below a target previously set. But resist the temptation to invest more than once per period. However cheap the market looks, it may indeed by cheaper next week.

TMFVerity 19 Feb 2009 , 4:02pm

Great article

Jimeni 19 Feb 2009 , 4:08pm

I think many investors who have been waiting on the sidelines are starting to drip feed into the market now, with interest rates so low its discouraging us from holding too much cash.

I think the FTSE does have further to fall but when April rolls around and I get my next ISA allowance I will be dripping some money in for the long term.
Whatever your short term view the market will recover and timing it perfectly is impossible, with my cash doing painfully little I'm looking forward to getting back in.

Yorkstyke 19 Feb 2009 , 4:44pm

At last! Someone saying the market might have further to fall.

I'm also pleased to see that 2 people (castath and kinshaw) are commenting about the writer's previous forecasts!

tymon 19 Feb 2009 , 5:57pm

I agree with TMF verity

TYmon

TMFGoogly 19 Feb 2009 , 9:54pm

I agree with tymon :-)

Munkstar 20 Feb 2009 , 12:36am

Waste of time, get it out and stick it under the bed, looking at the finance problems of Eastern Europe and the exposure of the European banks to it ...... were stuffed.

LucianGriffith 22 Feb 2009 , 9:49am

More gloomy news... :-(

Lucian Griffith.

uryjm 23 Feb 2009 , 7:56am

The Bottom of this Market May Still Be Ahead.
Or Maybe it's Not.
RBS is a fantastic buy at 22p.
Or maybe it's not.
Investing in Chinese small caps with solid balance sheets will offer market beating returns in the next three years.
Or maybe they wont.
Would anyone like to send me fifteen quid a month for more of such startling, insightful analysis?

Join the conversation

Please take note - some tags have changed.

Line breaks are converted automatically.

You may use the following tags in your post: [b]bolded text[/b], [i]italicised text[/i]. All other tags will be removed from your post.

If you want to add a link, please ensure you type it as http://www.fool.co.uk as opposed to www.fool.co.uk.

Hello stranger

To add your own comment, please login.

Not yet registered? Register now.

More articles in this section

Beta

Tags for this article

bear market
Bruce Jackson
Investing Strategy
Obama
stock market

Login or register to add tags.

Beta

Related content