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Global Credit Crisis

How to shake the bear market funk

By Ron Scherer and Patrik Jonsson / October 10, 2008

New York and Atlanta – Emergency interest-rate cuts. A presidential speech meant to calm the financial markets. New government authority to buy from financial institutions as much as $700 billion worth of bad mortgage-related debt – all designed to reopen the world's clogged credit markets.

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But Wall Street, gripped by a negative and increasingly entrenched psychology, is so far is shrugging off most of these herculean rescue efforts. After the worst week in the history of the stock market – with the Standard & Poor's 500 down 18.19 percent for the week – what will it take to make the sellers of stocks into confident buyers again?

It’s not a new question. In almost every severe market downturn, investors at some point see only the gloom and doom. Here’s what ultimately dispelled previous dark clouds:

•In August 1982, the Federal Reserve abruptly reversed course and began cutting interest rates. It sparked a bull market that sent S&P 500 stocks soaring 229 percent over five years.

•Immediately after the crash of October 1987, then-Fed Chairman Alan Greenspan threw money at the banking system, resulting in a bull market that pushed stocks up 65 percent over 2-1/2 years.

•In 1990, following a run-up in oil prices and a recession, the Federal Reserve cut interest rates and the S&P 500 jumped 417 percent over the next 9-1/2 years.

•By March 2003, after the bursting of the dotcom bubble, the excesses were finally wrung out of the markets. The resulting market increase ran until 2007, and stocks climbed 101 percent.

What will it take now?

Time, primarily, say some stock market strategists. That’s the view of Sam Stovall of Standard & Poor’s in New York, who notes that the $700 billion bank rescue plan won’t actually be implemented for about another month. “People expect it to be working already,” he says. “It’s like if I plan on losing weight and I joined a health club that won’t be open in November, and people are upset that I haven’t lost weight yet.”

Next week might still be a little dark, Mr. Stovall worries, because many investors will get their brokerage statements over the weekend. “We could have one last wringing of the towel,” he says.

It also might take yet more government action, says Fred Dickson, chief market strategist at D.A. Davidson in Lake Oswego, Ore. He would like to see the Federal Deposit Insurance Corp. guarantee all deposits at all banks. Corporate treasurers and big investors are withdrawing their funds from banks to protect their assets, he says. “There must be a flow of funds back to the banks,” he says. “We need a big enough stick to turn around confidence in the banking system.”

This weekend, when finance ministers from the G-7 industrialized nations meet in Washington, presents an opportunity to reassure the public that there will be no more bank failures, says Bill Stone, chief investment strategist at PNC Financial in Philadelphia. “If they say, 'If you are otherwise solvent, we will guarantee your bonds,' that would help,” he says. “Right now there is so much negative outlook, any positive news can be the catalyst.”

Most investors just want the wild stock-market ride of the past two weeks to be over, and professional money managers usually warn them against trying to pick the bottom in bear markets.

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