In nearly unfathomable fashion, a dramatic swoon in the stock market has pushed share prices to levels last seen more than a decade ago, below even the last bear market in 2002 after the bursting of the dotcom bubble. We're talking early 1997, the year Bill Clinton was entering his second term in office, Brett Favre led the Packers to a Super Bowl victory, and "Terminator 2: Judgment Day" was released, which happened to reference 2007 as the year when computer technology rose to mount a nuclear attack on the human race.
The Alarming Statistics
Today's market may feel like financial Armageddon, but the fact of the matter is that stocks are becoming less risky the more the market falls. This is due in large part to the fact that company valuations are playing a distant second fiddle to market panic, which is causing forced selling as hedge funds, mutual funds and other portfolio fiduciaries raise funds to meet a fear-induced, coordinated wave of redemption requests. Year-to-date through the end of October, Standard and Poor's estimated that investors had lost $14.62 trillion in global stock market wealth in a mad rush for the exits, with October the worst performing month it has on record.
The worry is over the extent to which global economic growth will slow and dent corporate earnings. The concern is warranted - on November 18, S&P estimated that third-quarter earnings had declined 21.6% from the year earlier quarter and mentioned that had it not been for the energy sector, growth would have hit all-time lows. Clearly, the cheap-market argument is moot if earnings fall substantially, though corporations will see better days ahead once the economy starts to recover. (To learn more about this crash and others, check out our Crashes Special Feature.)
At a Bottom? Not Important
Until signs emerge that the market has hit bottom, redemptions are likely continue as investors fret over having enough capital to retire on and increasingly stay on the sidelines. With that, is there really a way to determine if we have hit bottom? Personally, I haven't read anything particularly insightful on this matter, and in a recent column in Forbes, market strategist Laszlo Birinyi confirmed that there is no smoking gun for those looking to time when to return to stocks.
He did mention that one indication of a bottom is when nine stocks rise for every one that falls, but this has happened at least eight times so far this year. He also cited a past statistic suggesting that the market bottoms when individuals short stocks more than floor professionals on the NYSE, but found no current statistics to support this phenomenon. Overall, he logically concluded "that there are no historical precedents, guidelines, or parameters to provide sure illumination" that the market has reached an inflection point and is on its way upward. He also advised being wary of any market prognosticator or strategist that tells you otherwise.
Birinyi's personal instincts, which echo that of many long-term investors, tell him that now is an ideal time to be buying stocks. His indications cite the fact that "businesses are cheap in relation to their replacement costs and to their post-recession earning power." Indeed, as any value-based investor will tell you, it's up to the individual to define value and take advantage of the market's over or under-pessimism in relation to a firm's underlying intrinsic value.
The Bottom Line
It won't be known when the market hit bottom until well after it has happened, so take a step back in time and pick up stocks at prices seen more than a decade ago. It's ridiculous that the market is now ignoring years of sales and cash flow growth for many firms, which will soon be expanding again once the current global recession passes. It's a matter of when, not if, meaning that the only thing investors should be panicking about is that the clock is ticking. Time will eventually run out to pick up stocks at what could very well be historically-low valuations.
A perusal of the 30 holdings of the Dow Jones Industrial Average shows world-class businesses trading at single-digit P/E multiples, including American Express (NYSE:AXP), Walt Disney (NYSE:DIS), United Technologies (NYSE:UTX) and AT&T (NYSE:T). And the money-center banks in the Dow, which include Bank of America (NYSE:BAC) and JPMorgan Chase (JPM) have share prices at multi-year lows. This list is a good starting point for further research, with most capable of easily doubling in price within the next few years as the business cycle makes its way back to high gear.
To learn more, read Turnaround Stocks: U-Turn To High Returns and Buy When There's Blood In The Streets.