Staying in stocks a test of sanity

One month into the new year and the stock market already finds itself in a deep hole.

For people whose portfolios were devastated by last year’s market crash -- but who still held fast to their stock investments -- this may force some soul-searching about how much more pain they can handle.

Right off the bat, let’s point up the good news here: Corporate, municipal and mortgage bonds generally have been profitable investments this month. So we aren’t in the situation we faced last fall, when nearly every market was in meltdown mode. There have been places to hide this time.

Stocks, however, are an ugly mess. The Standard & Poor’s 500 index slid 8.6% in January, its worst performance ever for the opening month of the year.

That’s bad enough, but this month’s plunge follows the 38.5% dive in the S&P; last year.

To anyone who at the end of 2008 vowed, “I’m not going through that again� -- sadly, we’re already on our way.

With the economy still showing no signs of recovery, equities are bearing the brunt of investors’ fears of the future, which makes sense.

Stocks fell again Friday after the government said that the economy shrank at a 3.8% annualized rate last quarter, the worst decline since 1982.

The drop was smaller than expected, but for the wrong reason: Rising inventories of goods during the quarter counted as a positive in the government’s calculations, but they’ll translate into more production cuts this quarter if consumer and business demand fails to pick up.

In December and through the first few days of January, Wall Street seemed hopeful that the government’s ongoing bailout of the financial system, and plans for an additional $800-billion fiscal-stimulus package, would be enough to stabilize the economy and set the stage for a rebound.

But the mood darkened as the month wore on. Fourth-quarter corporate earnings reports have been nightmarish. Companies in the S&P; 500 are on track to report an average year-over-year profit decline of 35% for the quarter, according to earnings tracker Thomson Reuters.

What’s more, analysts are slashing their estimates for first-quarter results: They’re now expecting a 25% decline, on average, double the drop they projected a month ago.

Even companies whose sales normally hold up well in economic slumps are finding themselves struggling as strapped consumers keep cutting back. On Friday, Procter & Gamble stunned investors by reporting an overall 3.2% drop last quarter in sales of its food, toiletry and laundry products -- and a 7.3% decline in operating profit.

“Consumers both here and abroad were under pressure from sharp declines in both housing and financial markets,� P&G; told analysts on a conference call.

The company’s shares dived $3.72, or 6.4%, to close at $54.50, a 2 1/2 -year low.

As many investors know, the market’s trend, historically, in January has more often than not dictated how the year will go. That isn’t likely to suddenly improve anyone’s mood after this month’s losses.

Many Wall Street bulls take comfort that major stock indexes still are above last year’s lows reached in a harrowing drop on Nov. 20.

While it’s better to be above those lows than testing them again, however, most investors aren’t going to be measuring their portfolios against what they had on Nov. 20. What people know is that, whatever was in their stock accounts at year-end, they have less today.

It’s understandable if investors fear they’re being manipulated now by professional traders, perhaps more than usual. Stocks have been hit hard in the last two sessions, assuring that the month would look awful.

What traders would love, of course, would be to shake you out at low prices, and get you to jump back in at higher prices if hopes for an economic recovery revive in February.

But it is becoming harder, not easier, to imagine how the economy pulls out of this recession any time soon and gets on a sustainable path of growth. Jobs losses are soaring, consumer confidence is at record lows and the housing market is continuing to sink.

If the stock market is looking ahead, as it’s supposed to, whatever improvement it thought it saw in December, when shares were rallying, has faded away amid relentlessly grim economic data.

No one can tell you with any certainty when we’ll get out of this. Financial advisors keep trying to focus clients on the long term, because that’s still the investment mantra. If you can handle that, great.

But we all have to live in the short term. If you just can’t bear the thought that the 8.6% drop in the S&P; 500 will turn into something much worse this year, you have options.

The simplest decision is to sell some of your stock holdings and move to cash. You’ll earn virtually nothing in short-term accounts, but let’s face it: Earning zero this month felt a lot better than losing 8.6%.

The other easy decision, particularly for investors in 401(k) retirement plans: Check out your bond investment options in the plan.

High-quality corporate, mortgage and municipal bonds are paying much more than low-yielding Treasury securities. And other than Treasuries, prices of many bonds have been rising this month as investors move in.

Bonds aren’t a way to get rich, and they can lose money. But a high-quality bond fund is likely to offer relative safety of principal this year that the stock market can’t.

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