Signs of Bottom: Brian Reynolds, Chief Market Strategist, WJB Capital Group
Signs of Bottom: Brian Reynolds, Chief Market Strategist, WJB Capital Group
Investors are frantically stretching their toes, feeling for a stock-market bottom, but can't find solid footing.
The Dow Jones Industrial Average fell 5.3% last week and is down 36% so far this year. The blue-chip
index is off 41% from its record high in October 2007. It was off 47% from that high Thursday, making this
the worst bear market since the Dow fell 49% in 1937-38.
At some point the selling has to end. Investors have moved mountains of cash to the sidelines and have
started to use it every now and then to hunt for bargains. That suggests to some market watchers a
bottom might finally be near.
But how can investors trust that the foundation will be lasting? The bear market is already in its second
year, the bottom has been tested and retested repeatedly, and stocks have continually plumbed everlower levels.
We went to some Wall Street pros, people who deal with hundreds of millions, billions, of dollars every
day. We asked them what they are looking for. What sign? What market signal? What will tell them that
the worst is finally over and the market is beginning to recover?
Here are some of their answers:
Brian Reynolds, chief market strategist, WJB Capital Group
Looking for easier credit, lower rates on corporate bonds
Mr. Reynolds, like many other analysts, believes the credit market must improve significantly before
stocks can begin a lasting rebound.
Certainly, the flood of money being pumped into the system by the Federal Reserve and other central
banks has thawed some corners of frozen credit, especially for banks lending to other banks.
But credit for everybody else is still extraordinarily tight. And that keeps a lid on stock prices.
Corporate-bond yields are critical gauges of credit tightness. Interest rates on bonds issued by companies
that credit-rating agencies consider below-investment-grade, or "junk," yielded nearly 20 percentage
points -- a record -- above safe Treasury bonds on Friday, according to Merrill Lynch data.
Investment-grade corporate bonds yield nearly six percentage points more than Treasurys, the highest
since 1932.
Such high yields suggest that investors believe companies will go bankrupt at levels not seen since the
Great Depression.
Many economists still doubt that is the case. In the meantime, however, companies that wish to borrow
money still must pay usurious interest rates. Until those yields fall, corporate profits, and stock prices, will
continue to suffer.
"Stocks bounce, and bounce hard, in bear markets," says Mr. Reynolds. "Yet we've gotten more ominous
signals from the credit market that stocks will eventually put in significant new lows."
"Something significant has to change in order to get any kind of lasting rally," he said. "Nothing has
changed yet."