Pick a Bottom — Any Bottom

Good Evening: Today turned out to be another brutal day in our capital markets. Investors ignored the usual advice of not getting too involved in the markets on the day prior to unemployment figures are due to be released, and stocks finished the day at their lowest levels since a year or two before a certain President was having trouble with the policies and procedures governing the White House internship program.

Some wanted to blame today’s damage on the disturbing lack of detail surrounding China’s “second stimulus”, a program many now fear will resemble the type of vaporware that plagued so many otherwise promising software companies during the dot.com mania. Others were concerned that the Bank of England looked like it was hitting the panic button with its rate cut cum bond purchase announcement this morning, but for details about today’s session, please see the stories below. By day’s end, the major U.S. stock market averages were down between 4% and 7%; Treasury yields fell between 6 bps and 18 bps; the dollar gained 0.5%; and the CRB index fell 2.5%. Despite a nice advance by gold, there was precious little joy elsewhere as we await tomorrow’s payrolls data. Expectations are for 650,000 job losses in February and an unemployment rate approaching 8%.

Since everyone seems to be asking just when and where a bottom in the stock market will make itself known, I thought I would share one of my responses to a reader who asked me this very question this morning. I first offer the disclaimer that “nobody knows”, but I will frame my attempted answer by comparing today’s horrendous economy and accompanying bear market to similar episodes during the past century or so. Barring some serious policy mistakes (and I wonder openly whether the mortgage “cram-down” legislation before Congress will some day be considered one), today’s U.S. economy is still no Great Depression. Nor do our markets look set to match the almost 90% decline from top to bottom seen from 1929 to 1932. Then again, I think we can all agree that what ails our economy and markets is worse than anything since that awful time, and the worst punishment Mr. Market has meted out since the 1930’s was a drop in the S&P 500 of just less than 50% (1974 & 2002).

So…if 50% is too little and 90% is too much, let’s try to imagine what percentage loss makes sense for our present day woes and just what levels in the Dow, S&P, and Russell 2000 those losses would represent if they were triggered. With the help of StockCharts.com and a calculator, here are those indexes, their all time highs, and the actual levels various percentage declines would visit upon investors:

Dow Jones Industrial Average — All Time High: 14,198.10
Down 50% — 7099
Down 53.6% — 6594 (today’s close)
Down 60% — 5680
Down 67% — 4685
Down 75% — 3550
Down 80% — 2840
Down 90% — 1419.80

Standard & Poor’s 500 — All Time High: 1576
Down 50% — 788
Down 56.7% — 682.55 (today’s close)
Down 60% — 630
Down 67% — 520
Down 75% — 394
Down 80% — 315
Down 90% — 157.6

Russell 2000 — All Time High: 856.50
Down 50% — 428
Down 59.2% — 349.45 (today’s close)
Down 60% — 343
Down 67% — 283
Down 75% — 214
Down 80% — 171
Down 90% — 85.65

If these losses seem a little extreme to you, they are. If you think declines of this magnitude cannot be visited upon our ultra-modern markets, think again. Not only do I have history on my side in making this claim, I have recent history backing me as well. The NASDAQ lost approximately 80% of its value from 2000 to 2002, so it can indeed happen. If you still think “it’s different this time”, please look at the same table using the KBW bank index from 2007 through today:

KBW Bank Index (BKX) — All Time High: 121.16
Down 50% — 60.58
Down 60% — 48.46
Down 67% — 40 (ish)
Down 70% — 36.3
Down 80% — 24.24
Down 84.3% — 18.97 (today’s close)
Down 90% — 12.12

The drop in bank stocks alone has already surpassed the carnage suffered by the NASDAQ after the dot.com bubble burst, and it looks poised to challenge the 90% loss level any day now. I don’t see the rest of the indexes cited above falling to the same depths, but declines of between 60% and 80% seem all too possible. Study these tables (which haven’t been double-checked and contain some rounding) and decide for yourself what seems reasonable and achievable. Then draw up a plan of action and pray that just the construction of this table alone is a contrarian buy signal. Pick a bottom — any bottom — anything is possible these days.

— Jack McHugh

U.S., European Stocks Drop as China Signals No Added Stimulus

Bank of England Cuts Rates, Starts Asset Purchases

U.S. Economy: Jobless Claims Exceed 600,000 Again