Can It Get Worse?

Yes. Absolutely. The stock market could go much lower as fear becomes the overriding emotion controlling investors' decisions. There are basically two drivers for the stock market: fear and greed. Greed is gone. No one thinks greedy. There's no reason for it. Everywhere investors look, they see reasons to sell, not buy, stocks. When fear comes in the room, reason goes out the window.

How bad can it get? Well, taking it to the absurd level, the Dow Jones Industrial Average could go to zero. Before it does that, there will be riots in the streets, buildings will burn, politicians will be gone. So taking it all the way to its natural conclusion doesn't make any sense. No one can put a number on it, as reflected in the DJIA. But it could go lower, much lower, than 10,000. How?

By investors giving up all hope. Not seeing any reason to buy anything. After all, only gold went higher in the last several years. Traditional havens like real estate, conservative stocks, even CD's at the bank, all became torture chambers as they went down, some slowly, others extremely fast. Is it any wonder investors now look out from under their bomb sheltered perspectives and don't feel like there's a reason for hope?

And they're being perfectly logical. The housing market looks to be even worse than thought a year ago. More new problems like ill-performed foreclosures and bad mortgage documentation and lawsuits from loans made years ago continue to plague lenders and buyers of lenders (think Countrywide by Bank of America). Houses aren't selling quickly enough to eliminate the "shadow" inventory, houses that are held by banks through foreclosures, that continues to hold down prices. Borrowers can't qualify under new, tough lending rules.

Jobs seem to be evaporating rather than created. While some industries, such as auto, are doing very well, based on September numbers, if more people don't get back to work soon, there won't be customers for all the new cars being built.

Interest rates are low, but borrowing is tougher. Whether it's for a business or a home or a personal loan, banks have had their hands (and arms and legs and head) slapped enough to know that any more bad loans won't fly with regulators. So they're sitting on lots of cash, willing to lend, but only to borrowers who don't really need the money.

Earnings have been decent in some industries, thanks to cost cutting, and some strong end demand. But that's industry specific, not generally. Technology continues to see upgrades from companies looking to be more efficient, using machines for people whenever possible. As mentioned, autos are rolling off assembly lines, and car manufacturers should show another positive growth quarter. Medical devices are still needed, as is most health care. But beyond these, it's hard to find growth in the current economy. Earnings will be important but investors have a hard time believing they'll keep improving if unemployment stays high.

And the other overhanging cloud: Europe, in particular Greece, then Italy, Spain, Portugal. Only Germany seems to be strong. If Greece defaults and sends banks that own its debt into bankruptcy, expect the dominos to fall worldwide. Solving the Greek problem is only a small step investors need to see in order to feel bullish again. It's not enough to make up for all the other concerns.

So is there any hope? There's always hope, but the market doesn't reward hope. It wants facts. Investors need to see lower unemployment, higher home sales, more retailers reporting better numbers (consumers make up about 2/3 of the U.S. GDP...the more they spend, the faster this economy gets back on track). In the meantime, what to do with any money available to invest?

Nibble the bullet, don't bite it. Buy small amounts of stocks. Gold has had its run. Don't venture into that particular mine. Research REIT's (real estate investment trusts) and mutual funds or ETFs (exchange traded funds) that specialize in them. Buy market leaders, like IBM (IBM), Apple (AAPL), Wells Fargo (WFC) and Google (GOOG). Discover companies that have increased revenues and profits in this tough economy (like Fastenal (FAST)). For more ideas, look at the Aggressive and Conservative columns on The Online Investor ( Buy stocks with good dividends (AT&T (T) gives better than 6% now). Get paid to be depressed and patient as the market gyrates. Dividends will help salve some wounds.

Just don't expect any great rallies. They aren't coming, at least not sustained ones. Each of the negative elements is too entrenched to be solved quickly. And each will have to be rectified for investors to believe once again that greed is ok, not necessarily good, but at least ok. Right now there is no greed to be found, and that's not a good thing, if you're an investor patiently waiting for this market to get better, afraid it will only get worse.

- Ted Allrich

October 4, 2011

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.