Major Damage

Very interesting data via Barron’s Mike Santoli:

“The virtually unwitnessed level of damage in a short period almost defies hyperbole. After Thursday’s drop to an 11-year low on the S&P 500, the index was farther below its all-time high than at any time since 1949. The year 2008, had it ended then, would rank as the worst since 1872 at least. The S&P hadn’t been as far below its 200-day average since 1932. Nearly 40% of S&P 500 stocks were below $4 billion in market capitalization, the minimum new stocks must meet to be added to the index. More than 40% of the stocks in the Russell 3000 were trading below $10.

Investment-grade corporate bonds have outperformed stocks since 1980. The S&P 500’s indicated dividend yield rose above the 10-year Treasury yield for the first time since around the time the Giants and Colts faced off in their classic 1958 championship game…

At the moment, the only close precedents for the past year are a pair of Great Depression-era bear phases. Andrew Burkly of Brown Brothers Harriman noted Friday that the current bear was 284 days old, and was down almost exactly as much as the 1929-’32 and ’37-’38 bear markets were after 284 days.

And this was about the point where the paths of those earlier markets diverged, with the ’29-’32 example sinking relentlessly to an 86% loss, and the ’37-’38 version beginning a bounce that recouped 50% of its losses over six months before rolling over again.

Santoli notes that if you want to be aggressively bearish at these levels, it “requires a belief that the economic implications of the present crisis at least rhyme with the Depression’s.”

While that dichotomy here sounds just about right, there is a third point in between: Earnings fall to $45-50 on the SPX, and multiples compress to 10-12 PE. That mutes the bounce to a 25-30% move, before rolling back to an S&P500 fair valuation of about 500-600 . . .


Major Damage
Barron’s NOVEMBER 22, 2008

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