When will stocks recover? The experts weigh in

— -- It's a question gnawing at even the most fearless long-term investors: Why won't stocks find a bottom?

After the worst week for the Dow in its 112-year history, and with 401(k) balances sinking under the weight of a frozen credit market, the thought process of the rational investor is under siege. "It is hard to tell where reason ends and panic begins," says Meir Statman, a Santa Clara University finance professor who specializes in the psychology of investing.

The sheer size of the losses, the immensity of the economic uncertainty, and the global scope of the crisis has investors wondering why the world of money has become so unfriendly so quickly.

Investors are worried. They're anxious. Their heads are spinning from too many unanswered questions related to their financial security. Why is this happening? Why can't the government fix things? Why can't stocks mount a rebound — even for a day? Why is it that the Dow can drop almost 700 points in a matter of minutes?

USA TODAY talked to experts to find out.

The emotional tumult follows last week's historic fall on Wall Street, which left the broad market 42.5% off its Oct. 9, 2007, all-time high.

In just five trading days, the Dow Jones industrial average plunged 1,874 points, which adds up to an 18.2% decline. Both the point and percentage drop were weekly records.

Investors were taken on a scary ride. On Friday, the Dow plunged almost 700 points in the first few minutes of trading, only to rally more than 1,000 points to climb 322 points into the black, before falling again and closing down 128 points at 8451. It was the first-ever 1,000-plus high/low point swing in history, says Dow Jones Indexes.

Why do stocks keep falling?

The answer: Lots of people are selling.

There are professional investors who have to sell to meet shareholder redemptions. Individuals are getting out because they're scared and want to avoid steeper losses in their retirement accounts. Some are getting out because they've lost confidence and think the global economic outlook is bleak.

"Massive liquidations by large investors keep pressuring the market in a steady stream of selling pressure," says Chuck Stutenroth of ZAR Fund Group. "Mutual funds are liquidating. Hedge funds are liquidating. Retail investors are liquidating. No one (is) waiting (around) for a bounce."

There's been an avalanche of "forced selling" by big private investment firms called hedge funds, says Bernie Schaeffer, president of Schaeffer's Investment Research. Hedge funds held more than $2.8 trillion in assets at the end of March, according to HedgeFund.net. "The hedge fund edifice is coming tumbling down," Schaeffer says.

Wealthy investors and big institutions that do business with hedge funds are asking for their money back because of poor returns. That's forcing funds to dump once-winning positions in sectors such as energy to raise cash. "There's a whole class of investors, whether they like the market or not, it doesn't matter: They have to raise money," says Jack Ablin of Harris Private Bank.

Linda Duessel, strategist at Federated Investors, says that just because some investors have to sell, that doesn't mean others have to buy. "There's a dearth of buyers. How will it go up without a buyer?"

Then, of course, there is panic selling by people who think they will lose everything. "As long as there is a great deal of fear, selling will continue," says Richard Yamarone, director of equity research at Argus Research.

Why haven't fixes worked?

Up to now, massive government intervention has been unable to boost flagging confidence, stabilize markets or signal to investors that the medicine administered from Congress, the Federal Reserve and Treasury will quickly turn the economy around.

Congress has passed a $700 billion economic rescue package, the centerpiece of which is to buy toxic mortgage securities from banks to thaw balance sheets so they can start lending. The U.S. on Friday said it will inject capital directly into banks and take equity positions to jump-start lending.

The U.S. government has backstopped two key gummed-up credit sources: money markets and the commercial paper market, which businesses depend on to get cash on a short-term basis. The Federal Reserve has bailed out insurer AIG, given Wall Street banks access to its cash and last week, lowered short-term interest rates in concert with other central banks around the world. The government has also raised the maximum insurance on bank deposits to $250,000 from $100,000.

But all that has not broken the pattern of despair — at least, not yet. A big reason is a sense that help is coming late and that the damage to the economy is already done.

"The nature of policy responses to this type of crisis is that you can't really do what you need to do until things are out of control, and as a result, it has less impact," says Edward Yardeni of Yardeni Research.

Another big negative is that the $700 billion plan has yet to be carried out, says Andy Brooks, head of trading at T. Rowe Price. Nor have the coordinated actions by governments around the globe kicked in.

The first purchase of toxic assets from banks is a few weeks off, and the plan to inject cash directly into banks will also take time. Many Wall Street watchers say more swift action is needed to restore confidence.

"What needs to come down is something that is very aggressive," says Jeremy Stein, an economics professor at Harvard University. "If we can fix the credit markets … stocks would right themselves."

The root of the problem is that banks and investors don't trust each other. And the government pumping money into the system doesn't change that fact, says Duessel. She's encouraged by the U.S. decision to take equity ownership stakes in banks, because it will instill confidence in whole institutions, not just individual stocks.

Why haven't stocks bounced yet?

At this point, with big investors still in redemption mode, no investor wants to be a hero and buy too early for fear of seeing stocks drop further, says Yardeni.

"You've heard of the concept of catching a falling knife; well, the current analogy is catching a falling chain saw," he says.

"I'm waiting," says Brooks, adding that four years from now, investors will look back at current prices as being ridiculously low.

Why isn't diversification working?

Investors are losing money in a wide array of asset classes. U.S. stocks are down; so are foreign shares. Commodities, too: Oil, for instance, is off 19% this year and nearly 50% from its high. Wasn't spreading risk around supposed to even out returns? Not this time.

Hedge funds have sold energy hard, and a weak economy has decreased demand for everything from oil to copper. And the theory that a weak U.S. economy wouldn't hurt global economies has proved false.

And when it comes to foreign stocks, they're in the same bad spot as the Dow. "This crisis that faces us today is a credit crisis that is global in nature and threatens the economy of every country," says Stutenroth.

Why no one-day massacre?

The 1987 stock market crash was quick and painful, a 22.6% drop in a single day. This waterfall decline, which some are calling a rolling crash, has occurred over two weeks. "We've had a series of panics," says Ablin. "Someone smelled smoke, and we're all filing out orderly. It is an orderly decline, but it's very disruptive, because it wears on you."

Stock investors are also taking their cues from the credit markets, where bad news seems to dribble out every day. Another theory is that investors trained to invest for the long haul have been losing their stomach for risk as the selling drags on day after day.

Why should investors ride it out?

Stocks are exhibiting many of the classic signs of bottoming. Fear is at record levels. Stocks are being sold without regard for their underlying value. The price of the market is at levels similar to where it was at the bottom of the 1987 bear market. And the massive reversal Friday is the type of action that over history has been a sign that stocks are near the end of a steep decline.

Says Yamarone, "The roller-coaster action could be a sign we are near a bottom. People will start looking at these stocks and say, 'I can't believe I can buy stock XYZ at that low price.' And that is when you get big swings in the other direction."

And if you don't need the money for several years, the market will recover eventually. When stocks get cheap, investors always return to buy. "There's no reason to sell into a fire sale like this," Ablin says.