Should investors still be wary of the stock market?

It would be nice to think the stock market couldn't possibly take another drubbing like it did last year, when the Dow lost almost 34 percent.

While back-to-back losses are not common, they do happen.

Since the 1920s, the Dow has fallen in two or more consecutive years four times: in 1929 through 1932, in 1939 through 1941, in 1973 and 1974, and in 2000 through 2002.

Some market watchers say another drop this year is unlikely because last year's was so swift and deep. "It usually takes a lot longer to go down the amount that it has," said Jason Thomas, chief investment officer with Aspiriant, a San Francisco wealth management firm.

From the market's peak in October 2007 through its trough in November 2008, the Dow lost 47 percent and the S&P 500 shed 54 percent.

"With the exception of the Depression, that's the high end for a bear market to retrench," says Matt King, chief investment officer with Bell Investment Advisors in Oakland, Calif. "That doesn't mean we are headed into another depression."

King says there are many differences between then and now.

In the 1930s, the government and the Federal Reserve raised taxes and interest rates, let the money supply shrink and threw up trade barriers.

Today, they are slashing interest rates, flooding the market with money and preparing the mother of all stimulus packages.

It's going to take awhile before all that kerosene ignites the economy. Nobody is predicting a quick upturn.

"It will be a difficult year," Thomas predicts. "We are likely to see bad and in some cases worse headlines." But he says this is typical at the end of the bear market. "It truly is a case of it being darkest before the dawn."

The stock market generally turns up six to 12 months before the real economy, and investors who wait for the all-clear signal before getting into the market will have missed most of the gains.

"If you wait until companies start hiring, you've missed the movement in the financial markets," Thomas says.

The trick is figuring out when the recession, which started in December 2007, will end.

The Great Depression lasted for 43 months. Since then, there have been 12 recessions, averaging 10 months in duration, according to the National Bureau of Economic Research.

The longest -- 16 months each -- were in 1973-75 and 1981-82.

Economist Ed Yardeni of Yardeni Research says there is a 60 percent chance that the recession will end around midyear.

But he also says there is a 40 percent chance we are headed for a prolonged, Japanese-style recession.

The problem is that "you have a tug of war between deflationary and inflationary forces," says Carl Kaufman, who is in charge of fixed-income investing at Osterweis Capital Management in San Francisco.

For now, deflation is the bigger problem, brought on by deleveraging. As credit gets tighter, companies and individuals must sell assets to repay debt. That causes asset prices to fall, which forces them to sell more assets to pay debt, causing prices to fall more. As prices come down, businesses and consumers postpone purchases, and that prevents the economy from growing.

"In Japan, deflationary forces got totally entrenched," Kaufman said.

To combat deflation, the Fed and Treasury Department have been throwing every type of stimulus they can at the problem.

If their war on deflation succeeds, the economy will recover, but the side effect could be hyperinflation.

King is also concerned about inflation but says now is a good time to invest in conservative companies that could benefit from consolidation as the economy shakes out.

"We are sticking with large-cap names with good balance sheets, low debt and a consistent record of paying dividends," he says. "We are looking at consumer staples, like Proctor & Gamble, and companies that sell them, like Wal-Mart and Costco."

Prefer mutual funds? Russ Kinnel, Morningstar's director of fund research, recommends some fine funds that reopened to new investors last year, such as the Sequoia Fund, Longleaf Partners, Dodge & Cox Stock and Causeway International Value.

He also likes the Jensen Fund, which focuses on blue-chip companies that aren't very dependent on banks for financing.

Charles Biderman, chief executive of TrimTabs Investment Research, says he won't be buying stocks until he sees corporations buying back their shares. "The house knows what is going on," he says.

"At market bottoms, they are buying. At market tops, they are still selling." He notes that announced buybacks were down more than 90 percent in December 2008 compared with December 2007.

E-mail Kathleen Pender at kpender(at)sfchronicle.com.

(Distributed by Scripps Howard News Service, www.scrippsnews.com.)

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