Daily Investment Interpretations

September 11, 2009

2009-9-11:  Today, the markets paused to breathe, falling back just a tad. The NASDAQ Composite gave up 3.12 points, (-0.15%) to end at 2,080.90, the Dow dwindled 22.07 points (-0.23%) to finish at 9,605.41 and the S&P 500 added 1.41 points (-0.14%) to end at 1,042.73. Oil fell $2.65 to $69.12 a barrel, while gold jumped $10 to close at $1,006. The VIX rose 0.6 to 24.15.
    Consumer sentiment rose a little more than anticipated in August. 
    We can now say that, in retrospect, the recent near market lasted about 18 months, from October 11, 2007, to March 6, 2009, with a peak-to-valley decline of -56.8%. It's now down about -33%, meaning that it might be expected to rebound about 50% from here if it were to regain its 2007 peak value of 1,562. -56.8%. It's now down about -33%, meaning that it might be expected to rebound about 50% from here if it were to regain its 2007 peak value of 1,562.
    One very interesting article, Bull in good form, forecasts earnings on the S&P 500 to run $60 a share this year and $75 a share next year (2010). At an average price-to-earnings ratio of 16:1, that would justify a level of 960 on the S&P 500 for this year, and 1,200 for next year. But cyclical bull markets generally top at P/E ratios of 20:1-to-22:1. That would correspond to a level of 1,500 to 1,650 on the S&P 500 peaks next year. (Normally, these tops tend to occur during election years.) If the markets didn't reach their apogee until 2011 or 2012, the readings on the market indices could possibly move higher before they fall back again. On the other hand, we're in a super-bear market, so really high values probably aren't in the cards.
    In the one previous super-bear market with which I'm personally familiar, the Dow generally reprised its 1966 high or slightly exceeded it in January, 1973; January, 1977, and June,1981. However, inflation reduced the real value of an investment continuously from 1966 through the end of 1982.
    We may see higher stock market peaks than most forecasters are predicting, since circumstances have to reach the point where complacency and euphoria prevail. It's also worth noting (I think) that this has been the deepest bear market since the Great Depression. In emerging from the 2½-year 2000-2002 bear market, the indices continued to climb until 2007 even though they didn't ultimately rise any  higher than they did in 2000.
    The next super-bull market might be expected to germinate in 2014 to 2018.