It's nearly four months since stocks reached their 2010 highs and began falling on investors' doubts about the economic recovery. Some analysts say it could be another year before investors get up enough confidence to restart the rally.
The economy isn't helping them. Last week, the Federal Reserve and two mass-market retailers, JCPenney Co. and Kohl's Corp., lowered their outlooks for the rest of the year. The CEO of networking equipment maker Cisco Systems Inc. used the same words as Fed Chairman Ben Bernanke to describe the economy: unusually uncertain.
The Fed also said last week it would start buying government debt in hopes of stimulating lending and in turn economic growth, though investors proved skeptical. The Dow Jones lost almost 400 points over four days.
But investors aren't even resolute about selling. Stocks have ratcheted up and down since late April. The market began August with a burst of optimism based on many companies' overall upbeat view of the rest of the year. The Dow rose 208 points Aug. 2, the first trading day of the month.
Subodh Kumar, global investment strategist at Subodh Kumar & Assoc. in Toronto, noted that the Standard & Poor's 500 index has moved within a range of about 1,020 and 1,217 this year. "That broad range will hold until the middle of 2011," he said. The index closed Friday at 1,079.25.
A similar but shorter-term prediction came from Steven Goldman, chief market strategist at Weeden & Co. in Greenwich, Conn. "It looks like it will be this way for the rest of the year," he said.
You don't have to be a market pro to understand why. Private employers aren't hiring at a pace that will get millions of unemployed people back to work. The government put the number of unemployed in July at 14.6 million. Meanwhile, many working people aren't making enough to pay all of their bills. And then there are those with jobs who are nervous and socking money away. This all adds up to weak consumer spending that can't give the recovery much momentum.
And there are still the fundamental problems of a troubled housing market and banks that aren't willing to lend. Even with the Fed stepping in, those issues are likely to remain for some time.
One sign that investors aren't expecting the economy to pick up speed anytime soon is the poor performance of small-cap stocks. When investors believe the economy is about to go on an upswing, they tend to start buying smaller company stocks on the theory that those companies will see the biggest gains when business is good. The Russell 2000 index, which tracks the performance of small-caps, is down almost 18 percent from its 2010 high close of 741.92, reached April 23.
The Dow, meanwhile, is down 8 percent from its 2010 high close of 11,205.03, reached April 26. And the S&P 500 is down 11.3 percent from its high of 1,217.28, reached April 23.
The deep troubles in the economy may well mean that even when another rally starts, it will still take years before investors can make back the trillions of dollars lost in the 2008-09 market collapse. The Dow has a long way to go before it comes close to surpassing the 14,164.53 record close it had on Oct. 9, 2007. While it is up 57 percent from the 12-year low of 6,547.05 it fell to on March 9, 2009, it's still 27 percent below its record.
Looking at the market's recoveries from some past collapses, it's quite clear that this time around, stocks won't enjoy a scenario like the 15 months it took the Dow to regain all the ground it lost in the October 1987 crash. The Dow didn't reach a new closing high until two years after the crash.
The worst scenario was the recovery from the 1929 crash. Because of the Great Depression, the Dow kept falling until July 1932. It took about a quarter century, until 1954, for the Dow to recover all the ground it lost and reach a new closing high.
Perhaps a more likely scenario is the market's recovery from the nearly three-year slump that started with the dot-com bust in early 2000. The high-tech collapse was followed by a recession, the Sept. 11, 2001, terror attacks and then a string of corporate scandals that sent stocks tumbling until October 2002. The Dow peaked at 11,722.98 in January 2000, then didn't return to that level and reach a new closing high until October 2006.