Bears still in control

12/8/2008


The experts are worried.

In November, the consensus among economists surveyed by Blue Chip Economic Indicators took an ugly turn. The economists projected a decline of 0.4% in 2009 gross domestic product (GDP), down from October expectations of a 0.5% increase.

Pessimism is also high among investment-newsletter editors, as shown in the bottom chart below. As of Dec. 2, 49.5% of newsletters were bearish, while just 23.1% were bullish. For perspective, consider that over the last 19 years, bulls have consistently outnumbered bears, and the average spread between the bullish percentage and bearish percentage was 13.7%.

As our name suggests, Dow Theory Forecasts relies on the Dow Theory, which is currently bearish. But bears have a lot of ammunition beyond the Dow Theory. In the following paragraphs, we consider two bearish forces weighing on investor sentiment:

Economic weakness: Real GDP fell in the September quarter, and retail sales fell in October for the fourth consecutive month, with early returns on November looking bleak. The National Bureau of Economic Research says the U.S. has been in a recession since December 2007. Consensus estimates for GDP suggest the recession could last through the first half of next year, which would make it the longest since the Great Depression.

The Market Trend Follower warns, “Recession is not pretty. Particularly for those on the wrong end of pink slips. After a fantastic ending to October and what many had hoped would be the beginning of a new rally, the reality is job losses continue to mount . . . While the U.S. Senate debates the future of the Big 3 automakers, companies like Citibank continue cutting jobs.” If weakness in the labor markets continues, it will be tough for individual investors to muster the will to buy stocks.

Political concerns: While U.S. stocks have historically performed better during periods when a Democrat was in the White House, many investors still perceive Republican administrations as friendlier to investors. The Wellington Letter reflects widespread fears about what could happen in Washington: The world’s problems “can only be made worse with the wrong programs and maybe lessened in severity with the right programs. But history shows that all the wrong policies are usually adopted. FDR proved that. Unfortunately, failures of governmental policies always result in extreme attempts at solutions, such as class warfare, extremely high taxes for business owners, and suspending constitutional rights. It won’t be pleasant.”

The historically large percentage of bearish newsletters is in itself a bullish indicator. Historically, strong markets have tended to follow periods when bearishness was high. Unfortunately, the timing of such recoveries is uncertain. Sure, the market will recover, but we cannot predict when. And there is enough bearish news in the market to keep investors nervous. 


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