"3-May-2009 01:26"

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Is history repeating itself?

Bear-market rallies have preceded tailspins in the past, raising investor
outlooks before draining portfolios

May 02, 2009 04:30 AM

Brett Popplewell
Business Reporter

There were several in the recession of 1957-58, a couple in the downturn of
1973, and one to remember in 1930.

Bear market rallies that brought false hope to investors and soothsayers
desperate to ignore all other economic indicators and rely on the strength
and intelligence of the stock index.

If you've been sitting on the sidelines waiting for the opportune time to
jump back in and hit that promised rebound, then recent stock market gains
look mighty appealing. But is this the real rebound you've been waiting for,
or is it just another bear market rally destined to break your bank – again?

If you ask Stephen Metcalfe, an investment advisor with Research Capital
Corp., you'll get a rather bullish appraisal.

"The markets, as leading indicators, are telling us that the worst has
passed," he said. "The economy is still in shambles, but the market knew
that a long time ago.

"While there will likely be another pullback, it will not be a crash or hit
new lows."

The Economic Cycle Research Institute predicted Thursday the recession would
end before the summer is out. It based its prediction on a return of
consumer confidence and home sales. Wal-Mart said this week that people are
buying more discretionary items, while stats now show consumer confidence in
the U.S. at its highest level since before the market meltdown last fall.

But ask others and you'll get a less optimistic view of the situation.

Avery Shenfeld, CIBC World Markets' top economist, is more of a bearish
pessimist. He argues that given the calamitous end to 2008, even moderate
bad news can be construed as a sign that good times are coming back.

"The recent improvement in financial market sentiment, therefore, rests on
shaky legs, and is vulnerable to a partial reversal, arguing for a cautious
investment stance," he forecast this week.

Nouriel Roubini, a professor of economics at New York University who became
famous by predicting the current crisis well in advance, is even more
pessimistic.

"Economists usually joke that the stock market has predicted 12 out of the
last nine recessions, as markets often fall sharply without an ensuing
recession," he told a gathering in Toronto last month.

"In the last two years, the stock market has predicted six out of the last
zero economic recoveries – that is, six bear market rallies that eventually
fizzled and led to new lows."

Even before the market crashed last fall, many people were drawing parallels
to the Great Depression. Some of those parallels have been stretches of the
imagination.

Others can't be easily overlooked.

In the summer of 2008, stock markets were thriving despite the U.S. having
slipped into a recession the previous winter. Warning signs that the credit
bubble in the American housing market might trigger a market nosedive were
overlooked. On Sept. 15, 2008, Lehman Brothers, one of the largest financial
institutions in America, collapsed under the weight of the deepening
subprime crisis, sending world markets into bear-market territories not seen
in nearly a generation. The market had crashed and helped propel an already
burgeoning global recession.

Nine months later, the world still stands knee-deep in negative economic
data. Meanwhile, stocks are indicating a return to prosperity.

In the summer of 1929, stock markets were thriving despite warning signs
that the economy was slipping into a depression. Fears that lagging
industrial production might soon be mirrored in the stock market were
ignored by an overwhelming sentiment, held by many, that the stock market
was an easy ride to prosperity.

On Oct. 24, 1929, Wall Street crashed, sending ticker tapes around the world
on a perilous journey into bear-market territories not seen then nor since,
and helped propel an already burgeoning global recession.

Nine months later, the world stood knee-deep in negative growth figures.
Meanwhile, stocks were indicating a return to prosperity.

Eerie, no?

Then, as now, speculators believed the market had bottomed out despite
increasing jobless rates and industrial indicators showing signs of
continued decay.

By June 1930, U.S. President Herbert Hoover infamously decreed to a
gathering of advocates for increased welfa "Gentlemen, you have come 60
days too late. The depression is over."

Within a month, the market tumbled to new lows. It continued to plummet, not
bottoming out until July 8, 1932.

If this is, as some people continue to insist, the Great Depression
revisited, now is probably not the time to buy back into the market.

Then again, the severity of the current recession has been debated from the
beginning. Alan Greenspan, former head of the Federal Reserve, began calling
this downturn the worst financial crisis since the Crash of '29 when Lehman
Brothers was still standing. Others, including the notable Depression-era
historian and Greenspan's own replacement as chair of the Federal Reserve,
Ben Bernanke, have been more positive in their outlook.

"Recently, we have seen tentative signs that the sharp decline in economic
activity may be slowing," he said last week.

Those signs have led to increased optimism and predictions the worst is
over.

But, as CIBC's Shenfeld said, "That's not saying much. Canada's GDP dropped
at an unprecedented annualized 9 per cent in the three months to January
2009. America looks to have posted the worst six-month stretch in
generations."

Unemployment in Canada is still on the rise. Personal bankruptcies are at an
all-time high and continue to climb. Despite bailouts galore, the North
American manufacturing sector continues to shrivel.

And yet the markets are up.

Louis Gagnon, professor of finance at Queen's University's school of
business, has put more time than most into studying stock market history.

Though he doesn't feel the current recession is nearly as cataclysmic as the
Great Depression, he said we can learn more about our current situation from
the state of the economy in 1930 than we can from the recessions of 1957,
1974, 1980, 1982 or even 1990.

"What has brought us down is not a mere contraction of money supply. It's a
deeper crisis; that's why all these other periods aren't very relevant to
now." During the past five recessions, the market was a leading indicator of
the recession coming to an end. However, each of those recessions also saw a
number of bear-market rallies that ended in pain for investors.

"All those other rallies represented some sort of triumph of hope over
experience. There's a constant tension of pessimists and optimists in the
stock market."

In each of the last six recessions, monetary intervention – not market
recoveries – put the brakes on the economic contraction, Gagnon said.

Massive interventions such as cutting interest rates and pumping trillions
of dollars into the economy have put the governments' handling of the
current crisis completely at odds with the collective laissez-faire approach
taken by governments in 1929-30.

Still, the credit crisis is not over.

"People are interpreting this (recent) market behaviour as an indication
that we are off the bottom," Gagnon said.

"I just can't imagine that this is the real thing. There's too much negative
data hitting the market on a daily basis. I'm not jumping back into the
market. Frankly I'm very afraid of it."