When Stocks Will Hit Bottom

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So far, the flailing stock market has dominated the attention of Wall Street and Main Street alike. Yet while governments around the world start to address some of the systemic problems in the markets, uncertainty goes far beyond where stocks will trade next month or next year.

With Wall Street in crisis, more all-pervasive problems in the U.S. economy were largely forgotten. Now, though, investors are turning their attention back to fundamentals -- and for the most part, they don't like what they see.

A glass half empty
How has the economy gone wrong? Let me count the ways:

  • Contraction. The nation's GDP fell at a 0.3% annual rate during the third quarter. Moreover, growth in government spending -- nearly 14% at the federal level -- offset steeper declines in consumer and private-sector business spending.
  • People out of work. Unemployment in October hit 6.5%, the highest in 14 years. Initial claims for unemployment benefits are up nearly 50% from year-ago levels.
  • Pessimism. Consumer confidence hit an all-time low last week.
  • More job losses coming. Firms like Symantec (Nasdaq: SYMC  ) , Electronic Arts (Nasdaq: ERTS  ) , and American Express (Nasdaq: AXP  ) are among the latest to announce new layoffs.

Is it any wonder we've seen the market resume its drop in the past two days? And until people start to believe that things will in fact get better at some point, the path of least resistance for the stock market will be down.

Still, as a long-term investor, you need to look forward to brighter times. And while it's impossible to know exactly when the economy will start turning around, there are some signs you can look out for that will give you a clue as to whether things are getting better.

Waiting for a turnaround
With the general mood among investors so negative, many traders want to see a capitulation among stock investors. If it happens, it'll come from a huge spike in bad news -- one that will include such dire predictions that you'll be tempted to join in the ensuing panic. Disciplined investors will realize, however, that most of this bad news is either backward-looking or was already predicted from previous events. Once shareholders anticipate the worst, there'll be nowhere to go but up for stocks.

Next, look for signals that some markets are bottoming. I'm not just talking about stocks -- other areas, especially the housing market, commodities, and corporate and municipal bonds, could be even more important. Consequently, stocks like homebuilders Toll Brothers (NYSE: TOL  ) and Hovnanian (NYSE: HOV  ) , as well as commodities plays like BP (NYSE: BP  ) and U.S. Steel (NYSE: X  ) , could be the first to turn as the economy recovers -- although there's no guarantee they won't first fall significantly, even from current levels.

Last but most important, watch to see if international leaders can start cooperating instead of working at cross-purposes. Although many countries seem content to blame the U.S. for the world's troubles, it'll take a coordinated effort to fix the problems that now plague the entire world economy.

If world leaders can work competently and effectively, the confidence they generate among investors and the public at large will do most of the work of fixing what's broken. From there, it should only be a matter of cleaning up loose ends.

Don't wait
Remember, you won't necessarily see any of these positive signs before the market turns. As soon as markets even start anticipating them, you can count on stocks rallying. But if you wait for the full recovery before you start putting money to work, you can also count on missing most of that rally.

That's why continuing to invest now, even despite the fact that things could get much worse, could work out better for you than waiting. Be smart with your capital -- but when you see opportunities for huge gains, don't miss out.

For more on investing in a struggling economy, read about:

When the markets fall sharply, you have a unique opportunity to buy great stocks cheap. At Motley Fool Inside Value, we're finding plenty of smart bargains. Want to see what we've found? You can -- and it's absolutely free with a 30-day trial.

Fool contributor Dan Caplinger expects to revisit recent lows before we get to the bottom. He doesn't own shares of the companies mentioned in this article. Symantec and American Express are Motley Fool Inside Value recommendations. Electronic Arts is a Motley Fool Stock Advisor selection. The Fool owns shares of American Express. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy won't let you down.

Read/Post Comments (3) | Recommend This Article (1)

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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 November 08, 2008, at 1:24 PM, markwg1 wrote:

    It's good to be prudent in this market. Look at the jobs losses... it was the highest in 15 years. October jobs losses were almost 240 000... more than the entire working population in Cuba!

    This market teaches us a lesson: Never buy and hold... once you have made a reasonable profit, just get out and wait for the next opportunity.

    The scary thing is we are approaching a holiday season in December... but the employment numbers are still very very bad.

    The possible remedy for this job market is probably to limit the number of women going to workforce (e.g. maximum 1% of women in a company). Why? Look at the top companies like GM, GE, Ford, Microsoft, Lehman Brothers, Goldman, Sony, Panasonic, Wal-Mart, Starbucks, Dell, IBM, Boeing, Lockheed, UPS, FedEX, Genetech, Merck, etc. These companies were founded by men... and create lots and lots of jobs for both men and women! but many women just work, work, they don't create more jobs... and that's may really push people salaries lower and lower overtime.

    Best example is Iran, Iran stock exchange was so far almost up 41% this year... because many women are not allowed going to work and that helps to stabilise the supply and demands of Iran job market.

  • Report this Comment On November 10, 2008, at 2:27 PM, lemoneater wrote:

    I think Mark felt the need to vent. If he lost his job, I'm sorry. I'm certain many women lost their jobs as well. I was nervous myself.

    Only in a totalitarian country could you limit the numbers of women in the workforce. Besides violating the principle of "liberty and justice for all"...eliminating women in the work force would create a colossal welfare state. It is better to allow widows and single women the chance to provide for themselves. Not to mention many married women pitch in to help provide for their families so that they can actually see their husbands. I would love to be able to stay home and have dinner ready, but not at the expense of never seeing my husband. There is no SUV or McMansion in the picture, but no debt either.

  • Report this Comment On November 10, 2008, at 11:13 PM, markwg1 wrote:

    I hope everybody (including lemoneater) knows that:

    following is a short list of comapnies created by men:

    Microsoft, Exxon Mobil, Apple, GE, GM, Chrysler, Mcdonald's, Toyota, Nissan, Las Vegas Sands, Wynn Casino, UPS, FedEX, Citigroup, Lehman Brothers, Boeing, Lockheed, IBM, HP, Kraft, Procter & Gamble, Wal-Mart, Perkin Elmer, Dow Chemical, Coca Cola, Pepsi, Google, Holiday Inn, Best Buy, Circuit City, DHL, BMW, Ford, Nestle, Hershey, etc. many of these companies were created by men in the 60s or sooner... why? because during that time, there were not many women in the workforce and it was much easier for men to find good jobs with high salaries. But today with more women compete for jobs with men, today's people salaries may just going to lower and lower.

    If more women entering the workforce and create more jobs, that's ok, but it's not true men! many women may just work, work and don't create more jobs and may really push people salaries lower and lower over time and push up the inflation... that's why it's a good idea to put a quotas to limit the number of women entering the workforce (max 1%) in each company.

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