Global News Headlines Incredibly Bullish for Stocks?

I’m certainly no bull on the stock market – at least not yet anyway. But the headlines in business and mainstream newspapers and internet sites continues to paint a depressing global crash that is reminiscent of previous bear market or crises lows.

 

The headlines are almost the same each day with bank failures, currency crashes, real estate funding woes, soaring bankruptcies, surging job losses, government bailouts, bank insolvencies and lately news about a depression quickly emerging across East and Central Europe.

 

With news like this – incredibly depressing – it’s no wonder the market continues to wobble. Judging by the market’s recent price action, the odds are high that we’ll shortly breach the November 20 lows and eventually, take-out the October 2002 low. The S&P 500 Index bottomed in October 2002 at 768; the index opens this morning at 789.17 or just 2.7% above its last bear market low.

 

It’s hard to be positive on corporate earnings in this highly bearish macro environment of plunging asset values in the worst bout of deflation since the 1930s. The banks are insolvent, domestic consumption has crashed, unemployment is skyrocketing since September and housing values continue to decline at an alarming pace. Every country is now suffering a hard recession as governments worldwide announce bold spending plans to boost flagging consumption.

 

When the headlines are this bearish is it not the time to start buying?

 

I know several high-profile investors that are licking their chops, accumulating distressed stock prices, busted bonds and bombed-out commodities, including oil. Unfortunately, these guys were early and they’re getting smashed to bits since January. Global stocks are down more than 13% already this year after crashing 42% in 2008.

 

Yet for contrarian investors, 2009 is their finest moment – if news headlines point to the future direction of stock market values.

 

In the last bear market low in 1981-82, Time Magazine, Business Week and other magazines all ran stories about the end of equity investing and capitalism on the brink. Stock prices had just completed a 16-year funk as the S&P 500 Index went nowhere from 1966 to 1982 in nominal terms while actually declining adjusted for inflation. Short-term interest rates under the Volcker Fed peaked at 20% in June 1981 and marked the bear market bottom.

 

An investor who bought the S&P 500 Index in 1982 would have gained a cumulative 1,118% in nominal terms (before inflation) or 644% adjusted for inflation by December 1999.

 

The 1973-74 bear market was equally devastating – and equally rewarding once it bottomed.

 

By December 1974, the S&P 500 Index had collapsed a cumulative 50% since hitting a peak in January 1973.

In late 1974, headlines included military conflicts in Vietnam, the Middle East and a host of bearish economic data including a plunging dollar, soaring commodities and rising inflation. The economy went into a nosedive starting in 1973 and remained in the doldrums for years.

 

Still, an investor who bought the S&P 500 Index in late 1974 at the bear market low of 60.96 would have gained 50% 12 months later as the market recovered. And from the bear market low of 60.96 in late 1974 that same investor would have gained a cumulative 264%, excluding dividends, by 1980.

 

The greatest bear market rally occurred from 1929 to 1932 when the broader market crashed almost 90% until bottoming in mid-1932. From its low in June 1932, the market thereafter surged more than 350% until crashing again in 1937. Still, an investor who bought stocks in 1932, 1933 or 1934 would not have lost money until stocks finally bottomed in 1942; the absolute low for the cycle was June 1932.

 

History confirms that buying stocks in the midst of economic crises can indeed pay-off even over a short period of time. This occurred in 1932, 1974 and 1981.

 

I can’t recommend stocks at this stage of the economic cycle. Yet I do believe that before 2009 is over investors will face the greatest stock market buying opportunity since at least 1982 or 1932. The best time to buy a distressed asset class is when the news is unrelentingly bearish. That’s exactly the case right now as the world suffers from accelerating disinflation or possibly, outright deflation.