As Thomas Paine wrote, these are the times that try men’s souls. Not to mention their retirement plans.
Over the weekend, Barron’s (subscription required) drew a line in the sand, arguing that U.S. stock prices may be at or very near their bottom:
“Sure, stocks could slide much further — but they probably won’t. By most measures, they are downright cheap…. [B]arring a global economic and financial meltdown, the Dow should bottom well above 5,000 and the S&P Index well above 500″
On the other side, Bloomberg looked at prices relative to average earnings over the last 10 years and advised investors to hang fire and keep their powder dry:
“Benjamin Graham, the father of value investing and mentor of Warren Buffett, would find most U.S. stocks expensive even after the Standard & Poor’s 500 Index dropped 56 percent in 17 months.”
Here’s the funny thing: Each article makes well-reasoned and convincing arguments to reach opposite conclusions. If you’re a small investor, how are you supposed to know what to do if the best financial reporters in the business can’t agree on whether stocks are a bargain or a rip-off?
Some Historical Perspective
At Friday’s close of 683, the S&P 500 was down roughly 57% from its high of 1565 in October 2007. In the 34-month bear market that followed the Great Crash of 1929 (which I think is the closest historical example to measure the current economic crisis against), the Dow Jones Industrial Average declined nearly 89% from its August 1929 high.
The S&P 500 is now in its 17th month of decline, which means we could be at the midpoint of our pain, using the Depression-era Dow Jones performance as a guide.
Both the Barron’s and Bloomberg articles conceded the market could fall another 25% to 27% from its current level, which would suggest a price level of about 499-512. But if the S&P 500 were to follow the pattern of the Dow Jones from 1929-1932 and bottom out at 86% below its October 2007 high, the price of the benchmark stock index would be about 171.
Although an S&P 500 below 200 seems almost unfathomable, the experience of the Depression-era market suggests the markets still have a ways to fall.
We have not yet begun to fight this economic crisis and we are only just beginning to see the far-reaching effects of our nation’s (and, in fact, the world’s) corrosive addiction to easy credit. My sense is that there’s a lot more bad news to come.
In the third year of World War II, the British won a decisive battle against the Germans at El Alamein. In a speech following the victory, Winston Churchill told Great Britain the win did not mark the end or even the beginning of the end; but perhaps, he said, it was “the end of the beginning.”
If history is any guide, the U.S. stock markets are still waiting for their El Alamein.
