Worst may not be over

Anguished investors may not
have seen the last of the sell-off

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By Lisa Singhania
Associated Press

After a decade of investing in stocks, Philip Little is about ready to get out.

A 50 percent decline in his portfolio has the 37-year-old Los Angeles publicist looking at alternatives, like suspending contributions to his retirement plan and using the cash to buy real estate instead.

His gut feeling: "There's more fallout to come."

"It seems like there's a corporate scandal a day. And I don't want to put my money into a company until I'm sure that the books are clean. Right now, I'm not sure," Little said.

He is not alone. Months of corporate accounting scandals and quarter upon quarter of dismal earnings reports have pulled the major indexes down to near or below their post-terrorist attack lows. Investors fear that the bear market that has engulfed trading for the last two years is simply going to get worse.

Those anxieties may be well-founded. Analysts say investor confidence is so fragile that it may be months -- or even much longer -- before the market can move and stay up.

"It's impossible to call the low right now. There's a lot of volatility out there," said Tom Galvin, chief investment officer at Credit Suisse First Boston.

"I tend to believe the economy and profits are recovering and the S&P 500 should be at least 20 percent higher by year end," Galvin said. "But it will be impossible to believe in that forecast until we can string together a week or two without any new admittances about accounting investigations."

Many people -- individual investors and markets experts alike -- think the indexes will continue to drop until Congress, which is acting on several pieces of legislation, actually passes tougher laws against corporate fraud. They want to see prosecution of more of the executives who are to blame.

"If we don't see government action, you're going to see people not reinvest or not invest very strongly," said Robert Vance Sr., a retired manager in Tucson, Ariz., whose portfolio has shrunk by nearly 15 percent. "We've got to take action against people who've taken advantage of people."

Al Mirman, strategist at V Finance in Sarasota, Fla., puts it more bluntly:

"What is it going to take to instill confidence? For lack of a better term, getting rid of all the crooks running U.S. corporations."

Others believe that the market is stuck in a trading range because of the lack of positive business results, but won't decline too much more. No one knows for sure, of course, and a lot of strategists, who had predicted market turnarounds by now, say it's simply too volatile to even guess.

Stocks were supposed to get a boost later this month from second-quarter earnings reports, which are generally expected to be an improvement from a year ago. But the incessant doubts about corporate accounting -- this past week alone, there were questions about Merck, Bristol-Myers and Duke Energy -- as well as the fact that business is still relatively tepid, may temper investors' reactions to any good news.

"The recovery everyone has been talking about assumes that improving earnings numbers are correct," said Russ Koesterich, U.S. equity strategist at State Street Global Markets. "But right now people are unsure that those numbers are an accurate reflection of the actual business."

Even when investor confidence improves, Koesterich warns that weak earnings could hold stocks back, as companies work off the excesses of the 1990s.

"This kind of a bear market can go on for years," he said, recalling the market's performance some three decades ago. "Between 1968 and 1982, the major indexes went nowhere."

That's not to say there won't be occasional up days or even 300-point surges. Brief, but unsustainable, rebounds are common during bear markets as buyers respond to the lure of falling stock prices.

But after two years of getting burned by a market that can't keep its gains, a lot of investors aren't willing to suffer through that.

"I think it's going to go lower, so I'm not buying until I start to see things go higher," said Rob Gelphman, 44, a San Jose, Calif., business owner, who bought Sun Microsystems stock at $12 after Sept. 11 and has since watched it crumble in half. "I'm going to wait, even if I miss out on the first part of the bull market."

When that sentiment peaks it's called capitulation, a selling climax marked by heavy volume and extreme losses that frequently occurs at the end of bear markets and the beginning of bull markets. But it's not clear that's where the market is headed now.

"This is not a recession-induced slump in stock prices, and so maybe because it isn't, you won't have that traditional high-volume capitulation," said Joseph Keating, chief investment officer at AmSouth Asset Management. "Maybe it will just wane ... sort of like water torture."

Keating counsels patience and, for investors who have the money and don't need it right away, prudent investing that creates a diversified portfolio.

"If you're a long-term investor, this is a good opportunity for you to put money to work," he said.

That's reasonable advice, says Joseph Sobota, 66, in Kalamazoo, Mich., but it's hard to follow. He estimates his portfolio has lost 15 to 25 percent.

"I think it's a very good time to buy stocks, but the psychology is such that most people aren't going to do that," Sobota said.

He is funneling all of his spare cash into a second home for his family.

"I still have faith in the system, and believe these problems are correctable," he said. "But this all has been a big disappointment."