Editorials

The stock market’s plunge has left many small investors so intimidated they are likely to miss out on the beginning of the next upturn and the chance to recoup their losses. 

It is one of the tragic ironies of the marketplace, confirmed in at least nine up-down cycles since World War II.  

As opportunity improves, many small investors won’t want anything to do the market. 

This feeling of defeat isn’t limited to stocks.  

Federal Reserve chairman Alan Greenspan has, in fact, expressed fears it could affect buying and selling in general, and thus delay any recovery. 

It’s in the stock market, however, that the psychological effect is most glaring. 

In the overall marketplace, a family that buys a car at the economy’s peak may still have it when the economy tanks. 

You can’t say the same thing about a stock that was purchased at the top and sold at the bottom, an experience shared by many thousands of small investors.  

Their loss is real and extremely painful, and it leaves them in a mood that tolerates no additional chances. 

Sadly, this gloom may descend as opportunity beckons, which in the present instance conceivably could be mere weeks or a few months away.  

This assumption is based on the likelihood that the economy begins to respond to lower interest rates about six months after the first rate cut. 

Gerald Perritt, an investment advisor with a historian’s perspective, states the case succinctly: “The Fed first cut rates in early January, which would mean an economic rebound will begin in early July. 

“If the slowdown had begun sometime last November, its midpoint would occur sometimes this month. If stock prices respond like they have in the past, the bear market bottom is at hand.” 

But investing deals with the future, anticipating events rather than waiting for them to happen.  

It means that the most daring of investors is willing to buy stocks amid the thickest blanket of gloom. 

Unfortunately, this is when many small investors decide they cannot take any risk at all.  

Dump your stocks at the bottom, says Perritt, who edits “The Mutual Fund Letter,” and you lock in your losses. 

Not only that, having dumped stocks at a loss increases the odds that you’ll miss out on the first stage of the market’s recovery. That is, you might miss out on what could be the prime time to buy. 

For reference and decision-making purposes, the average post World War II recession – and this is to date only a contraction and probably won’t deteriorate into a recession – lasted 11.7 months. 

The longest, 17 months, occurred in both 1973-1974 and 1981-1982; the shortest last nine months, in 1957 and again in 1990-1991. 

But, as happened in each one of the nine cycles, the stock market bear was routed months before the recession ended. In the 1990-1991 recession, the bear market ended in November 1990, the recession not until March 1991. 

John Cunniff is a business analyst for The Associated Press