The Bear Market In Charts

Bloomberg has an article that provides comprehensive data indicating what is surely a global bear market. The good news is the attractive valuations that are developing. The bad news is that if you had all your money in stocks before the decline, you won’t be able to take advantage of those attractive valuations. Well-allocated investors who keep some powder dry in cash or diversified into high quality debt will have the resources to buy new stocks as this bear market runs its course and eventually bottoms.

Long-term investors with 3-5 year perspective to evaluate returns will probably do fine even if they are being battered by today’s markets. Short-term investors need to be out of the way.

The most difficult decision is for retirees who depend on their portfolios to live. If they have been relying on dividends from their portfolio, fluctuations in price are not all that important in the short-term (unless, of course, they owned mostly mortgage REITS and banks that are cutting dividends). Retirees or others who need to utilize capital to live or to fund near-term uses, should not have had all of their money in stock — but if they do have more in stocks than they can afford to have eroded by a bear market, it may not be too late to take some off the table for recommitment later.

A major risk of taking money out of the market when things are bad is taking it out too late and then putting it back in too late with a consequent permanent loss of return. It is late, but perhaps not too late to take some equity money out of the market. The direction and momentum suggests that there may be enough additional damage to come that some advantage could be gained by raising some cash even at this late date.

For our own account, we went sold 1/2 of our stock positions in mid-December and have sold 90% of our stock positions by mid-last week. We hope to be able to gauge future bottoming behavior to recommit in time to capture well discounted values. REITS and banks which we have written about as sectors to avoid during 2007 will probably be ones to overweight during the next up cycle — possibly in 2008.

Here are key facts from the Jan. 22 Bloomberg article:

“Stock Drop Pulls 38 Indexes Into Bear Market; Banks Lead Plunge … Almost half of world’s biggest stock indexes fell into a bear market …

The MSCI World Index’s 3 percent decline yesterday, the steepest since 2002 … MSCI World valuations at the cheapest since at least 1995 …

… a bear market, commonly defined as a drop of more than 20 percent in a 12-month period….

The MSCI World Index of 23 developed markets is down 17 percent from its Oct. 31 record. The MSCI gauge of developing nations also reached a bear market yesterday …

Among 80 equity national equity benchmarks tracked by Bloomberg, indexes in Argentina, Australia, Austria, Belgium, Bulgaria, Chile, Colombia, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Hong Kong, Hungary, Iceland, Ireland, Italy, Latvia, Lithuania, Luxembourg, Mexico, Namibia, the Netherlands, Norway, Peru, Poland, Portugal, Romania, Singapore, Spain, Sweden, Switzerland, Sri Lanka, Turkey, Venezuela and Vietnam also have dropped at least 20 percent from recent highs.

… The S&P 500 has fallen 9.8 percent so far this year, while declines in the U.K. and Germany yesterday left those countries’ benchmark indexes down 14 percent and 16 percent respectively. …

… The slump has made stocks cheap by historical standards. The 1,953-member MSCI World is now valued at 14.1 times its companies’ profits, the lowest since at least 1995, according to data compiled by Bloomberg. Europe’s Stoxx 600 has a price-to- earnings ratio of 10.7, the smallest since at least 2002. …”

Here are some price charts for key indices that graphically demonstrate the point made in the Bloomberg article.