Today's Bear Market Grizzlier Than Normal

Yet another brutalmarket swing has left our investing pros with the unenviable task of assessing the severity and likely duration of the damage caused by six weeks of snowballing global financial crises. Their outlooks aren't encouraging.

Ken Grant, founder of Risk Resources, a New York risk-management advisory firm, offered this bleak assessment: "[I]t's pretty clear to me that we're still in the midst of the extended trauma the market has experienced for more than a year, and which has accelerated over the last several weeks.

"My best guess is that we [see] at least a few weeks more of a broken market, amid which the ability of most professional investors to discern and monetize pricing patterns will be at an historically low ebb," he wrote Wednesday.

While that trauma won't continue forever, Liz Ann Sonders, chief strategist at Charles Schwab, says what's happening now isn't an ordinary bear market, because the world is frantically recalculating the cost of living on unsustainable levels of debt.

"The current crisis is a result of the bursting of the housing bubble at the end of what was a two-decade cycle of rampant profligacy and financial engineering/innovation run amok," she wrote Wednesday. "Now we're in full-scale retreat mode -- huge bank losses have triggered ratings downgrades and margin/capital calls, which have triggered more selling, while crushing confidence and further constraining credit. This is the paradox of deleveraging."

Recognition of the problem, however belated, isn't quite enough, noted ISI Group co-founder Ed Hyman in a note written Friday that cites alarming data, such as a likely 25-year low in October vehicle sales and continuing home-price declines.

"The longer credit markets remain stressed as they are today, the longer the recession will last," he wrote.

What that means for equity markets world-wide is, unfortunately, wild swings as investors recalculate viable valuations.

"This market has become a waiting game, given the uncertainty how deep the economic downturn will be, the still impaired credit markets, selling pressure from hedge fund redemption and mutual fund tax-loss selling," wrote Thomas Lee, a JP Morgan U.S. strategist, in a Wednesday report.

Lee noted that over the past 20 days, the average intraday swing has been running over 6%, which exceeds the volatility seen in past bottoms and exceeds the volatility that followed the 1987 crash. "The high intraday volatility, we think, has sidelined more fundamental investors," and will continue to do so until that volatility drops to 3% or less, he wrote.

That will depend on the effectiveness of government intervention measures, both in the U.S. and in markets world-wide. Citigroup strategist Tobias Levkovich, writing last Friday, ruefully conceded that the intention and effectiveness of intervention will always be out of synch: "[I]t is challenging to determine when the multitude of policy efforts will 'catch' and overwhelm current selling pressure."

And while those efforts have been necessary, they could have been done better and inhibited, rather than exacerbated the crisis, said Ed Yardeni, president of Yardeni Research, who pointed a finger of blame at Treasury Secretary Henry Paulson for allowing Lehman Brothers to fail and trying to rush the $700 billion bailout package through Congress.

"While Mr. Paulson certainly deserves credit for doing his best to deal with the credit crisis, I think he made some fateful mistakes which worsened it and converted it into an outright credit crunch," Yardeni wrote Monday. "As a result, the Treasury, the Fed, and the FDIC -- as well as foreign governments -- have been forced to implement ever more expensive and interventionist policies to avoid a financial meltdown."

So, what now? Don't try to time the market, advises Lee, who conceded Thursday "we were burned in the past trying to be ahead of this bottom."

Merrill Lynch quantitative strategist Savita Subramanian noted Monday that large-cap growth stocks faced a "double whammy," with lower earnings expectations and rising risk amplifying the market's discounting. He and U.S. sector strategist Brian Belski advised sticking with companies that get cash to shareholders.

"According to our work, stocks with the highest dividend yields tend to outperform those with the lowest dividend yields by an average of 20.3% during periods of heightened market volatility," Belski wrote Monday. "In addition, there has not been a single bear market since 1970 where the highest dividend paying stocks did not outperform the lowest paying ones."

Citigroup's Levkovich, in a separate Monday note, said companies that provide value "both real and perceived" deserve a look in a period when value propositions are being expanded to fit tough times. Apple (AAPL), Wal-Mart Stores (WMT), Google (GOOG), Home Depot (HD) and even cable providers such as Comcast (CMCSK) deserve a look, he wrote.

But finding bargains now may not be an angst-free proposition, warned Jeffrey Kleintop, chief market strategist at LPL Financial.

"While the stock market may have bottomed on October 10, bear markets of this magnitude nearly always (10 of 11 times) pull back after an initial rally," he wrote Monday. "This 'retest' is often the result of lingering uncertainty over the potentially negative unintended consequences of policy actions, in addition to a reassessment of the depth and duration of the recession."

While there are likely more ups and downs ahead, he also noted that every recession and bear market since World War II reveals that stocks have always bottomed before the recession was over. From there stocks delivered an average gain of 25%, as measured by the S&P 500 index, recouping nearly all losses by the end of the recession.

Encouraging, perhaps, but not a promise of recovery anytime soon. More likely is the sober view of Risk Resources' Grant that "the next several weeks are likely to resemble the last several weeks, which is to say that they will be murder to endure."