Is This the Market Bottom?
The news isn't pretty: Earlier this week, the S&P 500 closed below 700 -- its lowest level since October 1996. This hurts, there’s no doubt. And as we watch stocks fall to new lows day after day, it seems as if the market's slide will never end.
But while these sorts of apocalyptic figures make for exciting minute-by-minute updates, they're not much use to you. They don't say anything about how stocks will behave in the future, which is what actually matters when you're deciding how to invest today. That's one reason investors always ask, "Is this the market bottom?"
Well, is it?
Opinions vary.
But last fall, in a New York Times op-ed piece, superinvestor Warren Buffett compared today's overwhelming pessimism to 1932, 1942, and the 1980s -- all fantastic times to buy stocks. Lately he's been adding shares of Burlington Northern (NYSE: BNI) and Ingersoll-Rand (NYSE: IR). Although Buffett doesn't try to time market bottoms, his urge to "be fearful when others are greedy, and be greedy when others are fearful" has helped him to make eerily prescient moves in the past.
When he says it's time to buy, it pays to listen.
One approach to answering the question
Using historical data from Standard & Poor's, my research shows that the average of the lowest quarter-end price-to-earnings ratio (P/E) during all recessions since 1937 is 11.7. With the S&P trading at 11.9 times earnings, we've about hit that point.
Another Great Depression?
With comparisons between the Great Depression and the Great Wipeout of 2008 growing ever louder, a simple worst-case approach is to look at how Depression investors fared.
According to the National Bureau of Economic Research, we're 14 months into this recession, and thus far, the S&P 500 index has lost 52%. Fourteen months into the Great Depression (January 1931), investors were down only 46%.
But while the stock market was hit harder in 2008, economic conditions were far uglier in 1930.