I’m no economist, but I think it’s a fun game to play. So, I’m going to make a prediction: we are likely within 1,000 points of the market’s (Dow Jones Industrial Average) bottom. Now, the recent financial roller coaster isn’t anything to sneeze at:
- The Dow has fallen 39% in the past year
- The S&P 500 has fallen 42% in the past year
- In the last six trading days, the Dow fell 20.8%. The definition of a bear market is when markets fall 20%. And we lost that amount in just six days. Six days, sheesh.
- There’s general panic all around. Newspapers, TV shows, and radio shows are all talking about how bad things are.
We are also at the point when people say they can’t see the bottom, which usually means we are at the bottom. But, I think there are actually some key indicators that we are very close to the bottom:
- Price/Earnings ratios are very low right now. The lower the P/E ratio, the “cheaper” stocks are. Since 1950, the average P/E ratio of the S&P 500 is around 16.5. In bear markets, ratios can fall as low as 7-8. Right now the P/E ratio is 9.5, and there’s good reason to think they won’t get down to the 7-8 range, but I won’t get into that right now.
- Home inventories are falling. That means more homes are selling, signaling the housing market is close to a turnaround.
- The average investor is bailing out of the market. Two weeks ago, investors pulled $7.2 billion out of stock mutual funds. Last week, they pulled $43.3 billion out, a 500% increase in one week. Panic like this is a sign we are reaching a bottom.
- The government will start acting on the $700 billion bailout soon, taking some of the unpredictability out of the market.
- It’s very likely we are in a recession right now. Believe it or not, in most recessions stocks reach bottom during the recession. That means, stocks start rising in price before the recession is over. I don’t expect this recession to last very long. Inflation is low and unemployment is low. What is driving this recession is fear and home prices. With home prices likely to stabilize soon and the government buying up the scary investments, the fear will subside and we’ll be on the other side soon.
The Dow closed yesterday at 8,579.19, so I’m guessing we won’t go below 7,500. That’s still room for a loss of an additional 12.5%, but along ways from the 39% we’ve lost already.
It looks like the market is on sale.