Trump trading trauma tripped-up those who got bullish on the nominal rate hike of the prior session ...
History Shows We’ve Hit Bottom
01/05/2009 11:30 am EST
Sam Stovall, Standard & Poor’s chief investment strategist, says the S&P 500 may well have bottomed in November, by several historical measures.
From October 9, 2007 through November 20, 2008, the Standard & Poor’s 500 index declined 52%, making it the third worst bear market since the 1929 to 1932 crash. One of the more amazing characteristics of this decline was its speed. The average “mega-meltdown,” or bear market decline of more than 40%, traditionally took 21 months to play out. This one took 13 months.
Where do we go from here?
Probably not lower, in our opinion. There are several reasons that a bear-market bottom may already be in place: The 52% decline is near the 54% drop recorded in the 1937 to 1938 bear market—the second worst since 1929. The current bear market retraced 103% of the advance during the 2002 to 2007 bull market. Traditionally, bear markets retrace an average 73% of prior bull-market gains.
At the 752 level, the S&P 500 was trading at a P/E ratio on trailing operating earnings-per-share (EPS) of 11.5x, equal to the lowest operating P/E ratio in the 20 years that S&P has been tracking operating results.
Finally, on December 8th, the S&P 500 closed 21% above the November 20th closing low.
Technically, that’s a new bull market. History indicates that only once since World War II (September 2001—January 2002) did the S&P 500 experience a bear-market gain in excess of 20% that was subsequently followed by an even lower low. Again, you have to go back to the 1930s to find exceptions to this rule.
S&P’s Investment Policy Committee has a year-end 2009 target of 1025, [which] anticipates about a 20% gain. By historical standards, that’s fairly conservative. When this bear market finally ends, history (which is no guarantee of future results) indicates speedy partial recovery. In the first 40 days after establishing a bear-market bottom, the S&P 500 has traditionally recovered an average 33% of the loss seen in the just-ended bear market. That would suggest an initial rally in the 500 from the 752 level to around 1020 before the market provides us a second opportunity to get back in.
Should November 20th end up being the low for this bear market, we believe 2009 may end up being a fairly good year for stock returns, if history is any guide. During the first year of a new bull market since 1932, the S&P 500 rose an average 46%.
We think next year’s potential recovery may be a bit more muted than in the past because of the price damage suffered by stocks in 2008. As a result, S&P believes that while a bear-market low may already be in place, the S&P 500 may meander in a trading range of 800 and 1100 over the intermediate term, as investors evaluate the recession and its impact on corporate earnings and equity valuations.
Related Articles on MARKETS
If we learned anything about February it was that the wall of worry can be climbed. The question is ...
Upheaval of the status-quo is really what the current angst, aside the monetary policy concern (and ...
When Blackberry (BB) was initially bought in our portfolio in 2013, some reckoned we were taking on ...