Volatile 3rd quarter for stocks ends on up note

[October 01, 2008]  NEW YORK (AP) -- Investors looking at their 401(k) statements for the quarter that ended Tuesday may be tempted to bail out of stocks entirely.

Who can blame them? With share prices down and daily triple-digit swings in the Dow Jones industrials almost the norm, most everyone would sleep better at night with a smaller stake in the stock market.

First, though, a reality check is in order: By historical standards, the third quarter actually wasn't that bad and not even close to the worst ever. In fact, it's not even the worst quarter of the year.

"Certainly it's somewhat disconcerting. But when you're in it for a long period of time, you don't worry about it as much," said John Doherty, a retired 54-year-old Chicago options trader. He's plowed another $30,000 into stocks in recent weeks and professes not to be worried about what he sees as temporary swings in his investments.

The Dow Jones industrial average fell 4.4 percent in the third quarter, down 499.35 points, a smaller decline than the 7.6 percent and 7.4 percent drops in the first two quarters of the year. The Standard & Poor's 500 index fell 9 percent in the quarter versus drops of 9.9 percent and 3.2 percent in the first and second quarters.

It was the Dow's fourth straight quarter of losses, the longest losing streak since a five-quarter drop that ended in 1978.

The six largest mutual funds -- popular homes for many Americans' nest eggs -- lost value in the quarter, with five suffering declines of 9 percent or more. American Funds' Growth Fund of America, the biggest with about $179 billion in assets, lost 15 percent.

The final trading days of the quarter show what many investors had to endure. The Dow lost 778 points in Monday's sell-off after lawmakers couldn't agree on a rescue package for the financial industry. Then it surged 485 points on Tuesday on optimism that the rescue package could be revived.

Financial advisers note that those who ditch stocks now, in hopes of getting back in later, are locking in their losses. History suggests those who try to time the market will fail and rob themselves of the chance to share in stocks' inevitable recovery.

But don't tell that to Selina Jarvis of Cranston, R.I. She swapped out all the stock in her 401(k) retirement account for bonds and other less risky investments.

"I'm losing more weekly than what I'm putting in," the assistant supermarket manager, who is in her late 30s, said Tuesday as she walked out of the Coastway Credit Union in downtown Providence. "I wish I did it before yesterday."

Over the past 30 years, the just-completed quarter ranks as the 10th worst percentage decline for the S&P 500. The worst was the fourth quarter of 1987, when Black Monday helped pull the S&P 500 down 23.2 percent for the three months.

"If you look over the quarter, it feels like we should be down 15 or 20 percent," said Chris Johnson, president of Johnson Research Group. "It feels to investors like they're just getting whipsawed around right now."

Not all sectors fared as poorly as the overall market. Airline shares were among the best performers, with most major carriers showing double-digit percentage gains after crude oil fell from its mid-July peak of $147 a barrel. Oil settled just above $100 on Tuesday. American Airlines parent AMR Corp. saw its shares double in the quarter.

Meanwhile, biotech stocks gained ground as investors were enticed by potential blockbuster drugs and multibillion-dollar buyout bids. Amgen Inc. rose about 26 percent for the quarter as investors awaited data on a potential drug to treat osteoporosis.

Uncertainty tugged at Wall Street throughout the quarter. Take one week this month: The Dow fell 500 points on the Monday after the bankruptcy of Lehman Brothers Holdings Inc. and the forced sale of Merrill Lynch & Co., and then regained 141 points the next day. Then it dropped 449 points a day later after the government rescued insurer American International Group Inc.

The week ended with a surge of about 780 points on Thursday and Friday on word that the government was cobbling together a financial sector bailout. After all that, the Dow ended that week down only 33 points, or less than one-third of a percent.

Those searching for a stock market bottom should be mindful that such downturns have historically been full of head fakes, strategists say. Even after market indexes do hit their ultimate bottoms, they tend to zigzag violently, rising and then falling close to their lows again before turning back up for good.

During 1998, for example, the S&P 500 bottomed on Aug. 31 at 957.28, down 19.3 percent from its July 17 close. The index rallied strongly over the next month, recouping nearly half its losses. But over the next two weeks, it plunged again to 959.44, just a shade above its bottom, before finally turning back up.

Technical traders call this phenomenon "testing the bottom," and it's happened to some degree every time the S&P 500 has dropped more than 19 percent since 1957, according to S&P strategist Sam Stovall.

Sometimes, when a market seems most bearish, it's actually hit bottom and is about to rally. Take the stretch between March 24, 2000, and Oct. 9, 2002, when the S&P 500 lost nearly half its value. By March 11, 2003, tensions about whether the U.S. would go to war with Iraq meant the index was still down 47.6 percent from its 2000 high.

Amid that gloom, a strategist on March 10, 2003, described an "irrational despair (that) seems to imply that there is no floor to stock prices." But the market finally turned back up, gaining almost 40 percent between March 11, 2003, and the end of that year.

Even if Congress approves a rescue package in the coming days, economists point out that the weak housing market and the credit crunch -- the main problems weighing on the economy -- remain.

Johnson of Johnson Research Group contends that some of the pieces for a sustained rally are not yet in place. He said investors need some development like the financial bailout or better-than-expected quarterly earnings from companies reporting in October to goad them into putting money into the markets.

"It's as if you had a full tank of gas in your car and no spark plugs," he said. "The cash is all the gas in the tank, but you've just got no catalyst to get that gas moving into the engine."

Johnson's pessimism about the immediate forecast for stocks could be well founded. October has been home to the famous crashes of 1929 and 1987 and pullbacks in 1978, 1979, 1989 and 1997.

At the same time, October has also been the launching pad for market rallies, hatching the turnarounds of nearly a dozen bear markets since World War II, according to Stock Trader's Almanac.

One piece of comfort, according to S&P's Sam Stovall, may be that October has heralded the end of five of the last nine bear markets.

But he acknowledged that today's market looks to be in uncharted territory.

"I don't know if (Monday) was the capitulation low for this bottom, but I do believe that now is not the wisest time to cash out of your equity positions," he wrote in a research note. "I recommend that you just sit tight."

[Associated Press; By TIM PARADIS]

AP business writers Stan Choe and Candice Choi in New York, and AP writer Hilary Russ in Providence, R.I., contributed to this report.

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