Looking for the bottom

If you feel like a deep-sea diver plunging to new depths in this murky and perilous stock market, you've got lots of company.

Returns for equity mutual funds during the third quarter of 2002 were way down near the thermal vents and those odd-looking fish that give off their own light.

Stock funds dropped 17.5 percent in their worst quarter since the third quarter of last year. After that, you have to go back to 1987 to find a bleaker three-month stretch.

Now, if you were in bond funds, you had a little bouyancy. Most fixed-income funds returned profits. But stock funds – including some stalwart sectors of the year such as gold – sank. Only 89 of the 10,300 stock funds tracked by the financial- information company Lipper Inc. rose in value last quarter.

In fact, the only solid gainers for the quarter were "bear funds." These investment products attempt to profit from a slumping market by using complex investment strategies such as hedging and trading in derivatives.

Alas, analysts say, the downward drift in stocks is far from over. Last week saw some gain for equities. "But that could be a [short-term] bear-market rally," says Alan Ackerman, chief market strategist with financial services firm Fahnestock & Co., in New York.

"Bear-market rallies can be very sharp," Mr. Ackerman adds, but they usually prove illusory.

"We're now in a cycle of uncertainty that few investors have experienced before, [one] in which most traditional strategies don't seem to be working," Ackerman says.

Wall Street's woes include sagging investor confidence following corporate accounting and governing scandals, downward revisions in corporate-earnings estimates, high jobless claims, and an unwillingness by corporate leaders to boost capital spending.

Also hanging over the market is the specter of war with Iraq. Wall Street, which dislikes uncertainty more than any other factor, will not be able to let go of its inhibitions until the war issue is resolved one way or another, experts agree. (See story, page 14, on "war-proofing" a portfolio.)

For the quarter and the year, all major market indexes are down sharply. The Dow Jones Industrial Average finished down 17.9 percent for the quarter.

The Dow's 12.4 percent decline in September alone was the worst for that month since 1937.

What's troubling is that the market is now entering its most dangerous period, October and November, when every obscure rumor carries the possibility of triggering massive selloffs.

It now appears likely that 2002 will be the third year in a row of market losses – and, in fact, the worst three-year period in the past half century.

So again the question surfaces: Are we near some kind of bottom?

"Unfortunately, bottoms are proven out over time, usually taking three to nine months to round out a market. So it could be some time before we even know," says Larry Wachtel, a vice president and longtime market-watcher at investment house Prudential Securities Inc.

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