Bull Markets Return When You Least Expect

I say this even though the current bear market, by my definition, began on Halloween of 2007 and is now more than four months old. We didn't even know we were in a bear market until mid-January, when the Nasdaq Composite dropped 20% from its peak, and that didn't last long. But now all the major indexes have passed their January lows and have dropped further to levels not seen in over a year. A worsening unemployment report issued last week had just about everyone proclaiming that a recession is underway.

So how does a bear market feel? In a word, bad.

I'm not going to pretend that I can banish such feelings, but let me offer a few glimmers of hope:

When this bear market began, stocks weren't overpriced by historical measures. Last fall, with averages hitting new highs, the price/earnings ratio of the S&P 500 was just under 17, only slightly higher than the average of 16.5 since 1989 (which includes the inflated 1999-2000 period). Now it's well below that average. A Wall Street Journal article warned that the multiple may get lower before it recovers, as indeed it may. But unlike real estate or Chinese stocks, no one is arguing that U.S. stocks were or are in a bubble.

The Nasdaq peaked on Halloween at just under 2900. Compare that to the bear market of 2000-02. The Nasdaq was over 5000 and dropped nearly 4,000 points, or 80%. It can't be that bad this time. Obviously, the Nasdaq can't drop 4,000 points. An 80% decline from Halloween would take it to about 580, which is absurd.

The average bear-market decline has been 37% (based on the last 19 bear markets). This week the Nasdaq was already about 25% off its high.

All bear markets end eventually. The average length of a bear market has been 18 1/2 months, but more recent ones have been shorter. This one is already four and a half months old. The bear market associated with the recession of 1990-91, to which the current economy is often compared, lasted just three months.

Feeling any better? Even if you're not, remember that it's important to invest with your head, not based on emotion. The best thing about bear markets is that they offer buying opportunities, several of which I've already signaled in this column. Which brings me to my final point:

Bull markets usually begin when things look their worst.

As I write these words, the market is rallying. Is this another bear market false start? Or did a new bull market just begin? We'll know soon enough.

I've been hammering Wall Street for the past two weeks (click here and here for more) about the failed auction markets and turmoil in municipal bonds, so it only seems fair to recognize some firms that have started to do the right thing for their clients. Last week the Aberdeen Global Income (FCO) closed-end fund, run by Scotland's Aberdeen Asset Management, broke the logjam and announced it was redeeming its $30 million in auction rate preferred shares, or ARPS. That's a small fraction of the $330 billion ARPS market, but this week Eaton Vance (EV) announced it was redeeming $1.6 billion in ARPS. These funds used bank debt to replace the leverage provided by the now-dysfunctional auction market, showing that financing is there for the high-quality securities held by these funds. Others, like big issuers BlackRock (BLK) and Nuveen, should follow their lead. I urge readers to keep up the pressure on their brokers and the firms issuing these shares.