After giving the economy and stocks the benefit of the doubt for the last three months, investors are not sure they should bet on a maybe.

The powerful rally that began March 9 has stumbled, and stocks worldwide have been on the decline. In the U.S., for example, after hitting its high in the recent rally on June 12, the Dow fell more than 250 points last week, and an additional 200 on Monday before slipping a bit more Tuesday.

"This is likely to be the pause that refreshes and allows the market to post new recovery highs in the coming months," said Merrill Lynch technical analyst Mary Ann Bartels.

Others aren't so sure. With the second quarter coming to an end, and some corporate leaders saying they have yet to see reason for optimism, investors are hesitant. One reason: The World Bank released a sobering report this week that undermined the pundits claiming that stimulus in China would help the world recover.

Rather, the bank said global performance will be slower than expected, with a 2.9 percent contraction in 2009. In March, before market cheerleaders went into full gear, the World Bank predicted a decline of 1.7 percent.

Investors are feeling particularly vulnerable now because of the severity of the economic conditions they have encountered, and also because the stock market has treated them harshly this decade.

Since the beginning of the decade, the stock market has declined about 39 percent, or a loss of about 5 percent a year on average, according to Standard & Poor's senior index analyst Howard Silverblatt. For an investor to break even for this decade, the market will need to advance about 64 percent. The last negative decade was the 1930s, with a cumulative decline of nearly 42 percent.

Meanwhile, bloggers have been circulating this week research by economic historians Barry Eichengreen of the University of California and Kevin O'Rourke of Trinity College in Dublin, who compared the economy's downturn with the Great Depression. Among their findings: Industrial production has declined as severely over the last nine months as it did after 1929, and world trade is falling more sharply than after the 1929 peak.

Although investors have been fretting recently about the possibility of inflation, Deutsche Bank economist Joseph LaVorgna has called it "the least of our worries."

He noted that although the pace of job losses has slowed, a growing number of people are out of work, and "the question remains as to when the end of the contraction will actually occur."

The second guessing that has taken hold of investors lately, however, does not bother S&P strategist Sam Stovall. He said it's natural at this point after a severe bear market.

"People start to think maybe the earnings will not be too good, and did we really want to be in stocks?" he said.

Now, the market is sliding again. And the sectors that delighted investors during the recent rally are looking the weakest. For example, investors are selling financials, energy, materials and consumer discretionary stocks once again and clinging more to defensive sectors such as telecommunications, health care, utilities and consumer staples.

But Stovall says that is to be expected in bear markets.

Historically, he said, after the worst point in the bear market there is a rally that lifts stocks about 21 percent on average over 50 days. The most recent rally was stronger than that, roughly 40 percent over about three months.

Now, a decline should be expected, as investors have second thoughts and wonder if the economy will indeed recover, Stovall said. If the downturn follows the norm, the market could decline 10 percent to 15 percent from the June 12 peak. Already, they've lost about 5 percent during that time.

And then, once Stovall's "digestive phase" is over, he would expect the market to advance again: 18 percent at a minimum and 64 percent at a maximum over 12 months. The average would be 36 percent.

During a downturn, defensive stocks tend to outperform, but eventually investors tend to turn to cyclical shares that show the most potential for earnings growth in an upturn.

Still, some analysts argue there is nothing average about a bear market that has followed one of the nation's worst financial crises. So they will be studying corporate earnings reports carefully over the next couple of months to see if there truly is reason for a rally.

(Gail MarksJarvis is a personal finance columnist for the Chicago Tribune and author of "Saving for Retirement Without Living Like a Pauper or Winning the Lottery." Contact her at gmarksjarvis@tribune.com.)

(c) 2009, Chicago Tribune.

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