WHAT IS a 'Graveyard Market'

A graveyard market is one in which bearish sentiment persists, causing existing investors to sell and new investors to stay on the sidelines. Existing investors do not want to acknowledge their large unrealized losses, and, as a result, they may not even look at their brokerage statements. At the same time, new investors remain fearful of future market declines and are reluctant to buy, even at lower prices. For both groups, the market appears dead, or in a zombie-like state.

BREAKING DOWN 'Graveyard Market'

A graveyard market reflects huge declines in the market over many months, if not years. Risk aversion is the dominant theme, even though valuation multiples may be low by historical standards.

For example, the S&P 500 dropped by 56.8% over the course of 517 days during the bear market of 2007-2009. Current, forward and even 10-year, or CAPE stock multiples all fell precipitously, but buyers still remained reluctant until March of 2009. Even then, many who had money to invest refused to re-enter for quite some time.

Conversely, Black Monday, in 1987, is not a graveyard market even though it ranks among the very worst declines for a single trading day, in percentage terms. Unlike the graveyard market conditions in 2007-2009, the 1987 crash did not last very long.

Fairly short-lived market declines as measured by points also are not graveyard markets. For example, the Dow Jones Industrial Index posted a record decline as measured by index points in February 2018. This led to many negative news headlines, but not a graveyard market.

Some of the worst graveyard markets of all time include the market crash of 1929 that preceded the Great Depression, the Tech Bubble of 2000 and the aforementioned Great Recession of 2007-2009.

Gauging a Graveyard Market

There is no single tool for predicting a graveyard market, or when it may end. One useful gauge, however, is the CAPE ratio, developed by Yale economics professor Robert Shiller. It also is known as the Shiller P/E, or P/E 10 ratio. The CAPE ratio smooths fluctuations in market P/Es that are the result of boom and bust economic cycles.

For example, companies tend to have higher earnings during an economic boom. In turn, this inflates their prices and the market's overall value. The result is a low current price-to-earnings ratio that does not accurately reflect the market’s value.

Similarly, earnings tend to fall amid a slowdown in the economy. This causes an extremely high current price-to-earnings ratio, which also does not accurately reflect market dynamics.

The CAPE ratio adjusts for business cycles and uses consumer price index values to adjust for inflationary pressure on earnings. If the CAPE ratio trends high, then the market often is in a boom period. Conversely, a CAPE ratio that falls for a considerable time tends to indicate a graveyard market. Lastly, a CAPE ratio that turns higher from an extreme low can help to gauge the end of a graveyard market.

  1. CAPE Ratio

    The CAPE ratio is a measurement that adjusts past company earnings ...
  2. Cape Cod Method

    Cape Cod method is used to calculate loss reserves that uses ...
  3. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained ...
  4. CVE

    CVE is the ISO 4217 currency code for the Cape Verde escudo, ...
  5. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ...
  6. P/E 30 Ratio

    P/E 30 ratio means that a company's stock price is trading at ...
Related Articles
  1. Insights

    Is the CAPE Ratio Predicting an Era of Low Returns?

    When the the CAPE ratio is high, as it is now, it can indicate a bubble economy nearing its peak. Are we headed towards another bust?
  2. Investing

    Repeat After Me: Valuation Is Not a Catalyst!

    Valuation is a powerful reasoning tool for asset allocation only if you've done the associated fundamental analysis.
  3. Investing

    Investors Face 'Pain' In Highest Stock, Bond Values Since 1900

    Bear market ahead: stocks, bonds and credit are at their highest average valuation since 1900.
  4. Insights

    Will Policy Uncertainty Index Doom Trump's Rally?

    Nobel Laureate Robert Shiller says soaring uncertainty regarding Trump's policies is a danger sign
  5. Insights

    Is the Market Really "Different" This Time?

    Despite what else is going on in the world, the market and investment strategy never truly changes.
  6. Investing

    Sysco and Other Big Movers In Services

    The market has been slipping so far today. The Nasdaq has fallen 0.3%; the S&P 500 has fallen 0.4%; and the Dow has declined 0.5%. The Services sector (IYC) is currently lagging behind the overall ...
  7. Investing

    5 must-have metrics for value investors

    In this article, we outline the five ratios that can help value investors find the most undervalued stocks in the market.
  8. Investing

    SXC Health Solutions Corp. (USA) Among the Nasdaq's Biggest Movers

    The market is having a bad day so far: the Nasdaq is trading down 0.3%; the S&P 500 has declined 0.4%; and the Dow has slipped 0.5%. The Nasdaq Composite Index is a capitalization-weighted index, ...
  1. What is considered a good working capital ratio?

    Learn about the working capital ratio, a basic liquidity measurement for representing the current relationship between a ... Read Answer >>
  2. Can stocks have a negative price-to-earnings ratio?

    A stock can have a negative price-to-earnings ratio (P/E). A negative P/E ratio means the company has negative earnings or ... Read Answer >>
  3. How can a company quickly increase its liquidity ratio?

    Discover what high and low values in the liquidity ratio mean and what steps companies can take to improve liquidity ratios ... Read Answer >>
Trading Center