HOLY COW!
I suppose if you were not prepared for the stock market's devastation and its wholesale destruction of wealth and security, what could you say about the ferociousness of this bear market?
Today alone:
S&P500 Index: 752.44 down 54.14 or 6.71 percent. Intraday low of 747.78. Lowest level since 1997.
Dow Jones Industrials Average: 7552.29 down 444.99 or 5.56%. Intraday low of 7507.60. Lowest level since 2002.
NASDAQ: 1316.12 down 70.30 or 5.07%. Intraday low of 1314.90. Lowest level since 2003.
Honestly, you have to go back to the 1930s to see such breadth of declines. From March 1937 to March 1938, the stock market declined by more than 54 percent. Except for November 1929 through July 1932, when the market declined by a staggering 86 percent, no other bear market has been as powerful.
HOLY COW!
I suppose if you were not prepared for the stock market's devastation and its wholesale destruction of wealth and security, what could you say about the ferociousness of this bear market?
Today alone:
S&P500 Index: 752.44 down 54.14 or 6.71 percent. Intraday low of 747.78. Lowest level since 1997.
Dow Jones Industrials Average: 7552.29 down 444.99 or 5.56%. Intraday low of 7507.60. Lowest level since 2002.
NASDAQ: 1316.12 down 70.30 or 5.07%. Intraday low of 1314.90. Lowest level since 2003.
In past months, when this observer suggested that the stock market could likely see the DJIA as low as 7,200 and the S&P500 Index at 700, the targets were predicated on several factors: 1) a bear market decline on the order of the 1973-75 decline - that was around 48 percent, and 2) a return to the price/earnings valuations (PE) in the pre-1995 era - a much lower average PE of around 14 or so.
So where are we now?
Since peaking at 1565, the S&P500 is down 52 percent. The DJIA is down 47 percent. NASDAQ is down 74 percent.
Honestly, you have to go back to the 1930s to see such breadth of declines. From March 1937 to March 1938, the stock market declined by more than 54 percent. Except for November 1929 through July 1932, when the market declined by a staggering 86 percent, no other bear market has been as powerful.
Let's look at some scenarios in attempting to value stocks going forward through this dramatic recession. Everything is based on a return to an historic "norm" PE of 14.
S&P500 earnings decline to 2005 levels: S&P500 value 979
S&P500 earnings decline to 2002 levels: S&P500 value 386
S&P500 earnings decline to 1997 levels: S&P500 value 556
Using a simplistic approach of averaging those corporate earnings levels, you can make a case for the S&P500 Index declining to 640. That would translate into a DJIA of 6400.
Recently, Standard & Poor's reduced their earnings forecast on the Index component companies for 2009 to about $49. Applying a PE of 14 to that number and you arrive at 686. By the way, the average S&P500 earnings for the aforementioned three periods was about $46.
The trouble is this, as if those numbers are not frightening enough. How predictable are corporate earnings in this environment? If the Big Three auto manufacturers cannot recover, the ramifications for the entire economy are monumental. Metals producers, electronics, glass, rubber, carpet, etc. will all be severely affected.
The other assumption here is that a PE of 14 will be seen as reasonable - not 12 or even 10. And if you lived through the 1970s and were an investor, those lower PEs were commonplace.
Bottom line: 7200 on the DJIA and 700 S&P500 may be too easy to reach. Investment managers and analysts that are suggesting we are at or very close to a stock market bottom should be history. They have no reasonable basis for such conclusions.
I have been pointing out the high dividend yields of many quality companies that are likely to survive the current devastation. Yet the yields continue to increase. The suggestion to me is that investors don't care. They just want to preserve their principal. As do I and as should you.
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