Markets will stay in the woods for some time yet

JK Galbraith's

history of the aftermath of the 1929 crash showed how rallies were often "dashed" on Mondays, says Hugo Dixon on Breakingviews. Investors appeared to become even more risk-averse after retreating to their families over the weekend. It seems something similar happened this week, with equities losing around half of last week's bounce. The market's fragile confidence was dented as American manufacturing activity fell at its fastest rate in 26 years, and the eurozone, India and China saw record lows. Fed chairman Ben Bernanke saying the Fed could buy long-dated bonds to reduce rates and stimulate the economy made it clear that "the US is in a real struggle to avoid" a Japanese-style slump, says Gerard Baker in The Times.

Global investors now seem to have given up on the idea of a quick recovery, but are rattled by uncertainty over how bad and long the recession the worst world downturn since the 1930s, says Capital Economics will prove. And as bad news still has the power to shock, it seems investors have yet to come to terms with how "truly awful" 2009 will be, says Socit Gnrale's Albert Edwards.

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This process looks far from over. Look at how the speed and ferocity of the downturn is overwhelming earnings forecasts and company outlooks, says Jenny Davey in The Sunday Times. The lack of visibility is illustrated by GKN, which said late last month it expected profits for 2008 to fall by 20%. By mid-November it was pencilling in a 40% drop. "I'm not even looking" at the 2009 Wall Street numbers as they are too high, says Alec Young of Standard & Poor's. "We are still finding out where the bottom is."

That's just it until, as Edwards says, we "get some idea where this all ends", it's premature to talk about market bottoms, or cite statistics saying when the trough will occur, because stocks typically bottom many months before a recession ends. Until there is more visibility, confidence will be fragile, making markets vulnerable to further downside surprises and selling panics, no matter how cheap stocks may appear. Markets are "still in the woods", says Graham Secker of Morgan Stanley, and with the data deteriorating fast and deflation looming, they're likely to stay there for some time.

Staying in the market is not always the best strategy

We're always being told that no one can time the market, says Anthony Hilton in the Evening Standard, and that if you don't catch the market's best days you may miss a large chunk of the long-term gains from stocks.

But what about the impact of the market's worst down days? In one British study, for instance, £100 would have grown to £1,854 between 1969 and 2006. Missing the ten best days would reduce that to £979. Yet missing the ten worst days yields £3,819.

Market timing may be tricky, but that doesn't mean it's worth being in the market all the time.