US stocks: Outlook for week ahead

Oct 09 2010, 10:36 IST
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SummaryMarket high a memory, now American investors are wary of stocks.

When the US stock market hit its all-time high some three years ago - three years that somehow seem much, much longer – Bob Auer's life was simply, very, very easy.

Then a broker with Morgan Stanley in Indianapolis, Auer had no trouble convincing clients that they could make money buying stocks.

"You could pick up the phone and get people to do just about anything because everything was working and it had been working for a while," he says.

A bubble fueled for years by easy credit and soaring real estate values stopped expanding on Oct. 9, 2007. That day, the Standard and Poor's 500 hit 1,565. Within a month, it had fallen more than 7 percent as traders began questioning subprime loans.

You know the story from there. Investors who stuck with the market through the worst U.S. financial crisis in 70 years are still down about 20 percent from the boom days after accounting for dividends, wondering whether their accounts will ever recover.

If history is any guide, it may be a while. It took 15 years for investors to recover from the Crash of 1929 if they reinvested their dividends, and 25 years for the stock market to come back if they didn't, according to a study by Ned Davis Research.

While no one is betting that it will take until 2032 for the stock market to fully recover this time, there are signs that investors could be drifting in the doldrums for a while, even after last year's rebound. It took seven years for stock prices to regain their highs after the Internet bubble burst in 2000.

High unemployment, stagnant home prices and a shrinking demand for stocks as Baby Boomers begin to retire will likely stomp on the foot of any market run-up in the future, economists say.

Even if the market has another 9 percent jump as it did in September, few expect it to last.

"It's going to be some time before you see the S&P back at 1,575," said Keith Hembre, the chief economist at First American Funds. "There's a tremendous number of imbalances out there, whether it's the deficit, zero percent interest rates or the bloated federal balance sheet."

On Friday, the S&P 500 closed at 1,165.15, still 25 percent off its all-time high. The Dow broke through 11,000 for the first since in May but remains 22 percent below where it stood in October 2007.

The money moving out of

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