The Worst Is Yet to Come

Great rally we're having, isn't it? In the past month, the S&P 500 has risen from around 750 to right around 900 before falling back slightly. Right now, you've got a nice neat 15% gain. Think we're through the worst of it?

Think again.

My magic crystal ball doesn't work any better than anyone else's, but if I had to guess, I'd say we'll be back down near the lows before winter ends. Consider:

  • Reality -- and more pessimism about the economy -- may set in after the Obama administration takes office and optimism gives way to the sober understanding that the new team's economic solutions will take time to work, and will be expensive.
  • Along the same lines, the recession has hit Wall Street and the upper echelons of corporate America very hard, but the serious pain is just starting to filter down to Main Street. That process will intensify over the next few months.
  • Past bear markets have been marked by sharp rallies off the lows -- followed by sharp declines right back down. The true end of a bear market is typically marked by a point of maximum fear. That's when it seems like everyone's throwing in the towel, and when there's little talk of bargain-hunting.

That last point is the one that's most convincing for me. Do you think we're at the point of maximum fear? If you've been investing for a while, root around in your memory and think back to late 2002. Think of how preposterous it would have seemed to buy Apple (Nasdaq: AAPL  ) at that point, even though its share price (around $8) was close to the value of the company's cash holdings (around $6 a share).

Many stocks back then were insanely undervalued -- in hindsight. But at the time, nobody had the stomach for technology stocks. The whole sector seemed left for dead. It was awfully hard to visualize a bright future for Apple -- much less one that would include the explosive growth fueled by the iPod, the iPhone and the tremendous Macintosh renaissance of recent years.

That's what a bear-market bottom feels like. I think we haven't seen it yet. I also think that's good news -- if you want to buy the next Apple-at-$8.

It's the little ones that make you rich
The crazy bargains from 2002 aren't the ones I'm thinking about now. Sure, you could do a lot worse than picking up Apple now under $90 -- but Apple's a less speculative investment than it was back in those pre-iPod days. Moreover, it hasn't been beaten up nearly as much, and its growth trajectory is unlikely to be quite as steep as it was in recent years.

What I want right now are the stocks that we'll be citing as examples during the next bear market, seven or 10 years down the road, the ones that will be 20-baggers or 40-baggers, the growth leaders of the coming decade.

Finding them isn't as easy as it looks. You could have bought Akamai (Nasdaq: AKAM  ) for a buck in late 2002 and seen it ride to more than $50 as its business boomed and cash flow swelled. But you could also could have bought Art Technology Group (Nasdaq: ARTG  ) for about the same price at the same time. That wouldn't have been awful -- Art Technology was one of the more notorious of the dot-com bubble stocks, but it eventually recovered, became profitable, built a solid book of business, and was up more than $4 until September's market drop lopped off half of its value -- but that's hardly the same as the huge gains you'd have seen with Akamai or Apple.

It's those big ones that we want to find.

Finding tomorrow's Amazon.com right now
We want the great innovators, the coming superstars. We want the Genentech (NYSE: DNA  ) and Starbucks (NYSE: SBUX  ) of tomorrow -- and we want them now, before Wall Street catches on. Which now-obscure companies will break the rules of their market segments, change the way business is done, and be the household names of the future?

What company will be held up as the great renewable-energy leader of the next decade? Does First Solar (Nasdaq: FSLR  ) still have a chance, will the battle go to Suntech Power's (NYSE: STP  ) low-cost solar cells, or is there another name we should consider? Which small health-care innovator is developing the blockbuster medications and treatments of the 2010s? Who will win the race to provide a new generation of super-efficient batteries?

I don't know, but I do know that Fool co-founder David Gardner and the Rule Breakers team are working overtime looking for exactly those kinds of stocks -- the big names of tomorrow that are still hiding in obscurity today. This bear market represents an incredible opportunity to buy some of their best ideas at what could be once-in-a-lifetime prices. Want to see their best picks for right now? A free trial gets you full access for 30 days -- with absolutely no obligation to subscribe.

Fool contributor John Rosevear owns shares of Apple and Art Technology Group. Starbucks is a Motley Fool Inside Value selection. Suntech Power and Akamai are Motley Fool Rule Breakers recommendations. Starbucks and Apple are Motley Fool Stock Advisor picks. The Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (31) | Recommend This Article (94)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 24, 2008, at 4:04 PM, titanicdwn wrote:

    What we see now is but a vague shadow of 2010. True to form with coming job losses, winter will be unusually cold that year. Where is global warming when you need it?

  • Report this Comment On December 24, 2008, at 4:15 PM, 181736065 wrote:

    "... I'd say we'll be back down near the lows before winter ends."

    Silly rabbit.. I'm told time and time and time again by other Fools when I say these kinds of things that you can't "time" the market.

    Bill J.

  • Report this Comment On December 24, 2008, at 4:29 PM, wuff3t wrote:

    "... I'd say we'll be back down near the lows before winter ends."

    Now that's hardly a prediction of a market low, is it? He doesn't say the market won't go lower; nor does he suggest a precise time when you should invest; nor, indeed, does he even suggest you should aim to try to spot the market low and invest at that point.

  • Report this Comment On December 25, 2008, at 10:36 AM, titanicdwn wrote:

    Actually, investing in the USA from this point on is foolish to begin with. It is true the market will rise from this point, just like the rear half of the Titanic rose before it went under. The fact that it will rise(a little), and focusing on that, is being truly foolish. Further, I was not just picking years off a calendar. It is a matter of judging distances from point A to point B. From where we are now, considering the economic slide and speed of decline, what kind of jobs are left on Main Street, the USA will suffer a deadly blow in 2010. It will wreath like a worm cut in half for a time, but the outcome is predictable. Please remember that these estimates are assuming everything else being normal. If there is an atom set off within the borders of the USA for instance, the time left changes considerably.

  • Report this Comment On December 25, 2008, at 10:45 AM, titanicdwn wrote:

    Yes, I know a worm can live cut in half so some say, but the USA cut in half(some parts still doing well)is like so very little and way to late.

  • Report this Comment On December 25, 2008, at 11:01 AM, WakeJKirk wrote:

    @wuff3t: How could he predict any of those things accurately?

  • Report this Comment On December 25, 2008, at 12:35 PM, titanicdwn wrote:

    Its not magic really. The flow of events could slide somewhat from my estimates depending on certain variables. Also keep in mind that most investors are clueless when it comes to breaking points and stress levels in the lower economic strata. Hence, I could surmise the current situation before it actually happened. One example is the recent job loss of 1,000

    GM workers in Dayton, Ohio. Most investors could not care less because their strata is higher than that. But to Dayton and a good portion of Ohio the effect is horrific. Further, most people are not aware to what degree Washington and state governments are 'playing with the numbers' for as long as possible in an attempt to delay the final outcome. It was not that long ago Ohio had a boundless supply of money. But today... By simply assessing the rate the lower strata is under collapse, I can figure when the upper strata starts taking major hits. You may assume investors would feel it first. What you did not know is that people in the lower strata were already going into a survival mode that would not bode well for you. The collapse came before you knew you were about to get hit, but no surprise to me. You would have taken your money out otherwise. You are likewise thinking that low stock prices will rise(which is true)so of course you will want to buy now. And that is just one of the fatal mistakes investors will make.

  • Report this Comment On December 25, 2008, at 12:56 PM, titanicdwn wrote:

    My comment,"If there is an atom set off within the borders of the USA for instance, the time left changes considerably." was triggered by the fact that atoms are under construction by nations and groups not friendly to US interest. The Pentagon also considers no slight issue as they absolutely have real plan to deal with the aftermath and are quite worried about it. You could trust the experts, but I strongly suggest you become one. It will matter very little if a bomb is set of in the most remote region of the country as the fear and reactive elements climb to unbelievable heights. Suffice it to say Washington is far more worried about our response to such an event. However, assuming that no atom is set off, I will stick to my 2010 time frame.

  • Report this Comment On December 25, 2008, at 2:44 PM, titanicdwn wrote:

    Many investors today are looking at a 'Trojan Horse'. It offers so many opportunities. Low stock prices will rise. New regulations from Obama will seem to avoid certain problems which led to the current situation. Certain companies will profit greatly from others' mistakes, etc.. Then there is what is inside the 'Horse'. Only negative people look at what is inside the 'Horse'. Few people know modern archaeology actually discovered the city of Troy and there may be some truth to the Trojan Horse in its destruction. People never learn from history. So such warnings fall on deaf ears.

  • Report this Comment On December 25, 2008, at 3:58 PM, dibble905 wrote:

    If November 20 wasn't 'retesting the lows' set on October 27, in terms of the dow... I don't know what to tell you. The drop was quick and enormous, with that week in October registering the worst week by absolute and percentage terms in history.

    We are now back to the early 2003 levels for the S&P and Dow, erasing pretty much all of the recovery and expansion that has occurred in the past 5 years. And worse yet, that places us back to 1998 before even the dot come bubble.

    We are at the cheapest valuation in history in terms of companies with tangible, real assets (Dow & S&P). If this is not an opportunity, I don't know what to tell you. If there is more to fall, so be it. But it will be driven by emotions rather than logic.

    All of this 'the worst has yet to come' is out there, everyone is reading about it, everyone knows about it. The collective expectations of the world are priced into these stock price right now, and unless something overly catastrophic beyond even the worst expectations become true, the markets will rebound in the next year. Fear is in these markets, fear will continue to be in these markets. It will limit upward movements, but I really cannot see large scale drops like we have seen in October/November without what I suggested above.

    And to provide some support for my argument, hedge funds and mutual funds have enormous cash positions waiting on redemptions or to protect their positions. Either way, even if things do get worse, what's left to sell to drive markets down so much more? As well, when these large funds sell, someone's buying it -- who's buying these assets? It looks like the companies themselves are installing share buyback programs and insiders are actively purchasing. These may be a publicity stunt to stop the blood shed, but you know what, it'll probably work because it shows some confidence -- something that's been lacking lately. We also no longer see all stocks following the same broad market declines -- strong companies are rebounding 100-200% from their lows. The Dow and S&P aren't producing the same results, but that just separates the ones that were oversold and the ones that do have material concerns going forward.

    Be diligent and prudent, and you'll live through this. But don't hold off on an investment because you 'fear' a bigger drop coming. Unless you have some basis surrounding that, it's all emotion -- and no one rewards you for emotions.

  • Report this Comment On December 25, 2008, at 6:43 PM, dgmennie wrote:

    The latest stock market tumbles serve to underscore the fact that putting money into equities is essentially a GAMBLE (as opposed to an investment). How many blue-chip big-name companies and "sure things" of just 10-20 years ago still qualify as such today? Far too many have gone belly-up or merged themselves out of existence. Too often common stock owners are left holding worthless paper (hello ENRON). And this trend will continue, as the timeline for getting in and (more importantly) GETTING OUT becomes ever shorter and more unpredictable (DO YOU HAVE INSIDE INFORMATION?). Unless you are a very skilled and lucky stock trader who is emerged in the markets full-time, you will eventually LOOSE BIG. Depending on others to watch out for your best interests in this game is nonsense (I give you the 50-billion Ponzi scheme all over today's headlines).

    Instead, look carefully at the bond market. Certain corporate issues may be acceptable. Many municipals offer reasonable returns backed by the fact that states and local governments cannot simply disappear someday, leaving their debts unpaid. Fortunately, the yuppie go-go crowd finds the plodding predicrtability of these investments a turn-off. All the more reason why those who value protection of principle over "the next big thing" should get on board. IMPORTANT: Own the bonds themselves, not a "bond fund" whose assets will be churned with the profits sucked off by incompetent and overpaid managers.

  • Report this Comment On December 26, 2008, at 12:03 PM, rfaramir wrote:

    If your timeline for getting in and out of the stock is short, you indeed are a gambler. If you stick around and really own the company, you are an investor.

  • Report this Comment On December 26, 2008, at 12:06 PM, wuff3t wrote:

    WakeJKirk,

    Sorry - I was responding to fe3lixallen and pointing out that the author wasn't in fact trying to predict any of those things (which seemed to be fe3lixallen's criticism). I obviously didn't make myself clear.

    As to the doom-and-gloom merchants, I agree wholeheartedly with dibble905 - fear alone is no reason to stop investing. That's a sure way to lose money. However if everyone else wants to sell their shares I applaud their generosity as I will certainly buy some of them at ridiculously cheap prices!

  • Report this Comment On December 26, 2008, at 1:26 PM, RWICZ wrote:

    Why don't you people just slash your wrists, now?

  • Report this Comment On January 02, 2009, at 4:40 PM, Bonefish100 wrote:

    Bah, bah, bah. I'm on WakeJKirk's team.

    To all the scaredy-cats out there, you have all overlooked one key thing. The American people are ingenious and will come up with solutions to our problems, irrespective of what Uncle Sam does or down't do.. For those who are waiting in line for government solutions and handouts, you deserve to lose your money. Those who will be wealthy in five years are making their moves now. There will be bumps along the way, but it isn't like most of us are living in the slums of Bolivia or some other third world country. THEY are the ones with real problems. Geez, this is still the land of opportunity. Just ask any immigrant and stop your crying...

  • Report this Comment On January 02, 2009, at 5:55 PM, Buckoux wrote:

    IF an atomic device is successfully detonated within the borders of the Continental United States, it will at once be a catastrophe, and second bring on a Renaissance of nuclear energy when the radio-active cleanup proves to be so quick and easy. Much easier than poison gas or germs. If an "atom" goes off in the USA, I'll by nuke-power stock by the mega-shares!

  • Report this Comment On January 02, 2009, at 10:35 PM, realold wrote:

    Some of you guys must have had a horrible holiday.

    I wish you better in the future. In the meantime, watch some kids playing and enjoy a nice sunny day.

    Happy New Year.

  • Report this Comment On January 03, 2009, at 12:16 AM, deckx wrote:

    LOL, i hit the"click here its free" as I couldn't believe that MF was actually giving out free stuff.

    I was right, at the end of a very detailed, well written article with hints and innuendos appartently the next big thing is "cloud computing"

    Must admit, it has got me thinking about and i was almost tempted to suscribe ..

    So who ???, apart from google is going to lead the way of this new phenomenon ??

  • Report this Comment On January 03, 2009, at 12:19 AM, hom3w3rk wrote:

    Please comment: Here's my prediction....2009, the 7 year ARMs will adjust... followed by the 10 year ARM's in 2012. Unless the US Government does something to keep people in thier homes, we will see the same mess we did when the 5 year ARM's adjusted in 2007. More foreclosures, more bank failures due to more bad paper, followed by more fear uncertainty and doubt, which will keep consumers on the sidelines. This will be the final cause of the automobile industry failure (after the remaining cash infusion) and the ensuing spiral will increase unemployment, increase crime and taxes. It's gonna get real ugly. Me? I'm buying stock in weapon manufacturers....with the increase in crime, more people will be buying weapons to protect their families. The landscape IS NOT the same as the 1930's. In 1930, most Americans were "american". Not the case anymore, and who knows what "others" will do when they have no money and need to feed their families....

  • Report this Comment On January 03, 2009, at 7:18 AM, warren955955 wrote:

    I get a kick out of reading all these comments. First off....most market "guru's" don't know all that much about the market. They are big talkers but produce very little. I find that one can make money in the market by moving slowly and forgetting the hot stocks at the time. Buy good companies that pay dividends...sit back and relax...and make money. No you won't get rich overnight......but remember that less than 1% get lucky with market timing and most lose big dollars. Buy electric and gas companies and stuff that ordinary people need to use everyday. Its not all that exciting but you will win in the end.

  • Report this Comment On January 03, 2009, at 11:34 AM, snakeflake wrote:

    Everyone knows the world will end on December 12. 2012.

    Come on Nostradamus, the Myan calender and all the other prophets of doom can't be wrong. So all you really need is enough money to make it another 4 years. Wait a minute, that doesn't leave enough time for the antichrist to be revealed, the 20 years of peace he brings and the apocolypse.

    Come on people, things may get better or they may get worse. None can predict the fure or time the market. I say buy right now while stocks are low. If the market doesn't revover (it will eventually) then sell.

  • Report this Comment On January 03, 2009, at 2:02 PM, kayakingkarl wrote:

    We will know which way the market is heading before the month is up. It will either begin a long march up or a steep plummet downward. The up and down movements of today will soon be dominated by a strong upward or downward movement. That is my forecast.

  • Report this Comment On January 03, 2009, at 2:04 PM, kayakingkarl wrote:

    PS Take major profits now and have cash to invest come February.

  • Report this Comment On January 03, 2009, at 5:25 PM, samsamthelave wrote:

    The economy will not pick up until the largest group of spenders start buying, namely retirees and senior citizens. Their nestegg has been hit hard and values are about 50% down. They are afraid to spend money. The government should do everything possible to encourage those programs that will stimulate the markets to rise. When that happens the Seniors and retirees will spend and the economy will return. This piddly litte tax reduction of 20 to 40 dollars per pay check will do absolutely nothing. Getting the market up will be a stimulus that doesn't cost the government, to most people.

  • Report this Comment On January 04, 2009, at 11:01 AM, vraiment wrote:

    Typical of most articles that I've read from MF, little substance followed by lead into another article that you can subscribe to for 30 days with no obligation of purchase. Same smoke and mirror games played by others.

  • Report this Comment On January 04, 2009, at 3:55 PM, wonderingtoo wrote:

    I have lost most of the money I have ever put into the stock market trying to play the get rich game. I am done with buying and selling. Now I am sticking with a long term investment in a Mutual fund and purchasing 4000 dollars a year and leaving it. This technique has worked for 3 years now. I do not grow rich over night but I do get richer with dividends and cap gains increases. And because it is in a Roth IRA I do not have to worry about paying taxes on the money ever again. So, there is my opinion and I am sticking with it.

  • Report this Comment On January 04, 2009, at 4:30 PM, Jimmy2008 wrote:

    wonderingtoo;

    Please tell us what mutual fund(s) you have so that we can buy them as well. I am positively surprised that your IRA has been doing well for the last three years. Most people have had huge negative returns for the same time frame.

    Are they maney market funds or US treasury bond funds?

    Thanks.

  • Report this Comment On January 04, 2009, at 7:01 PM, garnman wrote:

    Responding to wonderingtoo:

    You are indeed a Fool to count on the tax free nature of your Roth. Pelosi and company are hard at work scheming up ways to change the rules and with a super majority, they will probably make it happen. The way I see it, we have one more chance in the next election to sweep out the socialists, provided there are viable and intelligent alternatives. If not, the USA as we know it will cease to exist. Find a little piece of property in the northwoods somewhere, learn to hunt, fish, trap and grow a garden. We are teetering on the edge of heading back to the early 1800's. Probably wouldn't be all that bad to start over with the Constitution and our history books as they were originally written.

  • Report this Comment On January 05, 2009, at 12:01 AM, DICKCO wrote:

    I mean this to be financial, not political. but an Addendum to above by Garnman. He is correct. We are headed downhill,headlong, into socialism. There have been over 150 so called democracies in the his tory of the world, NONE have lasted over 150 years, until ours. We have lasted quite a bit over that, but I think no one could could hardly disagree with me ,we are headed downhill, you think about how the government has taken control of our way of living and how many work for the government. Now, as for as my financial advise, I feel everyone should buy as many stocks and bonds as they can afford as soon as they feel the market has turned around a bit, I just wished I knew when that would be. dickco.

  • Report this Comment On January 07, 2009, at 11:47 PM, trenton1ryan wrote:

    Thanks Warren. That's the most intelligent post here.

  • Report this Comment On January 07, 2009, at 11:51 PM, trenton1ryan wrote:

    wonderingtoo: I agree 100%. Stop buying stocks like you're playing the lotto (hoping to get rich overnight) and focus on above (a savings acct) average returns (compounded) over the long haul. As someone who has gambling instincts, I understand all too well that it doesn't get your 'juices' flowing, but it's smart investing that really works. Question is, can you give it enough time (leave it alone) for it to work its magic??

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