The bears are out

The major stock market averages managed to post mild gains today after bouncing back from significant lows during the day.

By closing up for the day, the markets again avoided a close that would be officially 20% lower than their closing highs, which were set on October 9, 2007 for the DJIA and the S&P 500. On that day, the Dow closed at 14,164.53 and the S&P closed at 1,565.15.

During today's trading, the Dow reached a low of 11,185.71 at 12:44 p.m. Eastern -- down 21.03% from its high in October. By closing at 11,382.26 the drop from October's closing high is 19.64%.

Similarly, the S&P reached a low at 12:27 p.m. of 1,260.93 which represents a drop of 19.43% from its October closing high. By closing at 1,565.15% the S&P is currently down 17.9% from its October closing high.

With the stock markets treading along the boundaries of official "Bear Market Territory" (generally defined as a correction of 20% or more from a high), the bears are out in force in the financial media.

Bloomberg ran a story today highlighting the gloomy outlook of Eli Broad, founder of Kaufman & Broad (later KB Home) and SunAmerica, who declared that "This is worse than any recession we've had since World War II." Not only that, but the 75-year-old billionaire declared that "This is the worst period of my adult lifetime," which means that he must think the economy is in worse shape than it was at any time during the 1970s -- an astonishing comparison.

Yesterday, CNBC invited Peter Schiff to broadcast his bearish view that "this whole bubble economy that we have is now deflating" and that the only solution he sees involves the prescription that "we're going to have to live through a severe recession." Mr. Schiff was also featured in an interview over the weekend in Barron's.

In spite of the current market volatility, and in spite of comments like the quotations from Mr. Broad and Mr. Schiff cited above, the simple fact is that America is not in a recession right now and is not likely to enter a recession during 2008.

Even with the drag on the economy caused by the housing industry over the past two years, the GDP continues to expand. Gross Domestic Product is now over $14.2 trillion -- up from less than $10 trillion in the year 2000, and from $1 trillion to $2.6 trillion during the decade of the 1970s. Moreover, the growth rate of the GDP during the second half will probably be twice that of the first half of the year, due to the stimulus provided by the Fed since last fall. This non-recession will decidedly not be the worst since World War II.

In fact, we have stated before (here and here) that this market is likely to be volatile, and will have trouble finding its footing before the fall time-frame and the runup to the presidential elections.

In the meantime, we would advise investors to take a cue from the previous bear market and be willing to add and then add again during corrections, if your cash-flow situation makes that possible. As we noted back in January, it is very difficult to predict the real bottom in any significant market correction, and the market will often probe for a bottom several times before it is done, often separated by weeks or even months.

Adding to equity holdings during severe corrections takes genuine intestinal fortitude, and (as you can see from the quotations above) even wealthy investors often fail to do it when the bears are out and prowling.

For later posts dealing with this same topic, see also:

• "It's a panic, not a Great Depression" 01/21/2009.

• "Managing Investments in the New Era" 02/18/2009.

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