"We're nearer the bottom now than we were three months ago" - this is the sort of useless commentary coming from stockbrokers' analysts.
The US equity market this week finally entered an official bear market - a decline from its peak of 20 per cent. The most worrying feature this week has been the spread of the Nasdaq/Technology contagion to the broader stockmarket, with big non-technology stocks such as Citigroup, General Electric and Pfizer also falling sharply.
This comes a week or so after the top-rated equity strategists in Goldman Sachs, Merrill Lynch and Morgan Stanley have been queuing up to call the bottom of the market. Most traditional valuation models, which last year correctly indicated equity markets were too high, are now indicating most stock markets are cheap. Coupled with the prospect of further interest rate cuts from Alan Greenspan, this should normally attract equity buyers, particularly the US public which has been trained to "buy the dips".
However, the slew of recent bad news from leading companies such as Intel, Cisco, Motorola and Ericsson has turned investor psychology into bearish mode. The first US recession in a decade seems to be commencing. Consumer confidence is weak, business confidence is weaker and investment spending by companies is coming to a halt. The uncertainties regarding the Japanese economy and foot-and-mouth disease in Europe only exacerbate investor fears. Nobody is surprised that McDonald's warned of falling sales in Europe because of foot-and-mouth disease yet the share price fell 8 per cent on the announcement.
Until now, investors bought the dips. Now the common reaction is "it's too late to sell". We still need a final capitulation, a final panic of "it's not too late to sell" before the bear stops his rampage. The wider problem is that the bear market is now affecting the global economy. The European economy is starting to slow down. Intel, one of the most revered US employers in Ireland, is postponing its Leixlip expansion, causing 1,400 construction jobs to be lost. How would the young people of Ireland who don't remember the early 1980s react to continued job losses and falling house prices?
Our main worry is that investors are adjusting their risk tolerance for equities and will demand a high-risk premium following the disappointments of the past 12 months and uncertainty of future earnings streams. The US stock market is still at 20 times expected earnings. A fall to 16 times earnings (the 30year average) is another 20 per cent fall. To put this in perspective, the market traded at around eight times earnings at the bottom of the 1982 bear market (don't even try to do the maths!). Investors are paying now for the excesses of the latter 1990s bull market.
The nightmare scenario is that of a repeat of what has happened to Japan over the past decade. Nonsense, I hear you say - hopefully, but the risks are increasing. The prevention of a deep recession in the US is the most important task facing the Federal Reserve and new President. Let's hope they succeed and that this time next year the bear is back in hibernation.
How does an investor make money in this market? Imagine it is April 2003 and the world economy is recovering (nobody else is looking out this far). Think of the great "must-have" stocks you truly believe in, set bargain-basement buy levels for them, and buy no matter what if they hit those levels. At Hibernian, we believe our favourite stocks could easily make 50 per cent over this period, should our bargain basement prices be reached.
A final word from the world's most famous investor - Warren Buffet - from his latest shareholders' letter regarding his stock market holdings: "There are no `bargains' among our current holdings: we're content with what we own but far from excited by it."
Pramit Ghose is managing director and chief investment officer at Hibernian Investment Managers
