Vision - March 2009 - (Page 6) The econoMisT ANALYZING FUTURE TRENDS ] • [ by Shawn G. Dubravac, cPa the stock market has experienced a nega- finding a bottom for the stock market is tive annual return roughly 38 percent of not a single event, but a process that takes the time, but rarely has it fallen as abruptly time. After setting this low in November, the market would find itself up 19 percent as it did last year. In 2008, the stock market closed the year just a week later through Black Friday. Of down 40 percent. This feat has only hap- course this didn’t last with the market fallpened 15 months in the last 135 years—less ing nearly nine percent by Monday’s close. By the start of the International than one percent of the time. All CES, the market was up another 14 of these 15 month periods have percent for a total recovery of 24 occurred in just four years, 1931, percent in just 30 trading days since 1932, 1938, and now, 2008. As November 20th. And then over the the chart illustrates, the stock next nine days, the market would market over the last year has fallen as steeply and suddenly as take back 14 percent. This same story it ever has. is likely to play itself out over much of Shawn G. DuBravac So where do the comparisons the first half of 2009. end? Most of those 15 months happened In the bear market following the dotduring the 33-month period starting in com episode, we witnessed several similar September of 1929. During this stretch, the rallies—all of them fleeting. This last bear market collectively lost more than 84 per- market bottomed on October 9, 2002— cent of its value. Are we on a path to match eight trading days later the market was this epic decline? Already, we’ve matched already up 16 percent. This would ebb and the decline seen in the last bear market that flow over the preceding months, giving and started in 2000—having achieved that feat taking as only the market can do. By midin just 12 months instead of the 31 months March, the market would be up only three percent off the October low. Ultimately it required in the 2000 to 2003 period. takes months for the stock market to truly find a bottom. Where Is the Bottom? If we believe the 752 close of November If history is a guide—and it often is when it comes to the stock market—stocks tend 20th was a bottom for the market, where to bottom five to six months before the do we go from here? Looking at the priceeconomy does. Unlike things such as unem- to-earnings ratio (P/E)—the rate at which ployment, which tend to lag an economic investors are willing to pay for past earnrecovery and continue to rise long after the ings—will give us some indication of where economy has bottomed, stocks prefer to we might end 2009. All we need to know play the lead. is at what multiple investors will pay for With an economic trough expected in the middle of 2009, we Annual Stock Market Returns should begin to see the 150% stock market bottom, 100% well, right about now. Conversely, should 50% stocks continue to sink, we can take better 0% than even money that -50% an economic recovery is further away than -100% we hope. I believe the stock market hit bottom on Recession S&P 500 Y/Y % Change the 20th of November—when the S&P 500 closed at 752. But Source: Shiller, CEA it is worth noting that 1/ 1 4/ /18 1/ 71 1 7/ 87 17 10 /18 /1 83 /1 1/ 88 1/ 9 1 4/ 89 1/ 6 7/ 190 1/ 2 10 19 /1 08 / 1/ 191 1/ 4 1 4/ 92 1/ 1 7/ 192 17 10 /19 /1 33 / 1/ 193 1/ 9 4/ 194 1/ 6 1 7/ 95 1/ 2 10 195 /1 8 /1 1/ 964 1/ 1 4/ 971 1/ 7/ 197 17 10 /19 /1 83 /1 1/ 98 1/ 9 1 4/ 996 1/ 2 7/ 002 1/ 20 08 D Thoughts on the Bear Markets uring the last year, we’ve heard countless comparisons to the Great Depression. Certainly things aren’t as bad today as they were then, and in the end, we will come nowhere near to the devastation we saw in the 1930s. In 1933 for example, at the peak of the Great Depression, the U.S. experienced unemployment of 25 percent. Nearly one in four individuals was out of work. Unemployment in the current environment has increased precipitously and there is an increasing probability that we may witness double digit unemployment. While on the high end of my range, we could see as many as one in ten out of work by mid-2010 when I expect the unemployment rate will peak. A significant number to be sure, but nowhere near what happened in the 1930s. Still, on other fronts the current period does share some ill comparisons with the Great Depression—this greatest of recessions. In the last 135 years, we have had 28 “official” recessions. During these 135 years, March/April 2009 6 www.ce.org http://www.ce.org
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