by David Stanowski
09 February 2009
Here is another insightful study that missed the publication date of the last article, a couple of other interesting tid bits, and comments on where to invest your money in these risky times.
If I had the data on GDP going back to the 1920's, I would have included this study in "The Case For a Super Bear Market". Fortune Magazine made it easy and did this one for me!
This study simply takes the total dollar value of all U.S. stocks and divides it by GDP to get another take on whether stocks are historically expensive or cheap.
The 1929 Bull Market High was made when stocks represented 75% of the value of the GDP, but by the 1932 Bear Market Low that had shrunk to 40%.
The 1966 Bull Market High was made when stocks represented 85% of the value of the GDP, but by the 1982 Bear Market Low that had shrunk to 40%.
The 2000 Bull Market High was made when stocks represented an incredible 190% of the value of the GDP, and as of January 2009, they still had only dropped back to 75%; the level of previous major highs!
Based on the previous Bull Market-Bear Market cycles, the current level of 75% suggests that stocks should drop at least another 35% from here. However, with the extreme over valuation at the 2000 top, this Bear Market could bottom below the 40% norm of the past two Bear Markets.
10-Year Total Real Return:
This is an interesting study that computes the total return on the S&P 500, i.e, price appreciation + dividends, adjusted for inflation using the CPI, for the previous ten years.
This study begins in 1936, so the first cycle starts when the 10-Year Total Real Return dips slightly negative in 1946. From there, it pushes up to its all-time high of 19.1% in 1959, but drops to 10.2% at the 1966 High. This indicator goes negative in 1974, and remains mostly negative until the 1982 Low.
The next cycle starts by moving off the 1982 Low to reach 15.3% at the 2000 High, and just hit its all-time low last month at -5.1%! In other words, the most negative 10-year period since this data series began in 1936, was January 1999 to January 2009, which helps to put the magnitude of the current decline into perspective!
However, the most interesting pattern formed by this indicator is the 28 years of positive returns (1946-1974), followed by 8 years of mostly negative returns (1974-1982), which lead to another 26 years of positive returns (2008-1982). Will the pattern repeat with another 8 years of mostly negative returns (2008-2016)?
"Taking inflation and dividends into account, an investor who put money into the market any time after the end of 1996, and held on, now has less value than when he or she started."
"It has been said that earnings drive the market. That may be the case but as of late it's been all downhill. Today's chart illustrates that S&P 500 as-reported earnings have declined over 60% over the past 17 months, making this the largest decline on record (the data goes back to 1936). In fact, earnings are currently lower than they were back in the mid-1960s."
Also note, that as earnings drop, prices have to fall even further to get P/E ratios back into the long-term buying zone of 7 or less.
If we are in a Super Bear Market; where do you invest your money?
Since most people are not well suited for short-term trading or selling stocks short, the only practical place to invest is in safe short-term cash equivalents. Interest rates on these investment vehicles are being set by supply and demand. Currently, there is great demand for U.S. Treasury Bills simply because investors know that they have the highest probably of getting their money back at maturity. This is why TBills are paying almost no interest.
Today, we are in a world where everyone should be more concerned with the "return of their money as opposed to the return on their money".
Much higher yields are available on longer-term paper such as notes and bonds, but these rates are higher, BECAUSE there is a higher chance that you won't get your money back! High-yield corporate bonds are now paying almost 17% versus 0.29% on 13-week TBills. The difference in yield is based on the difference in risk.
During the 1980's and 1990's, many people became used to double-digit returns in the stock market and began to look on stocks as high-yield CDs; a high return for almost no risk. Those days are over! Higher returns than TBills can be made in the stock market, but they could easily have a negative sign in front of them! During a Bear Market simply protecting your capital puts you far ahead of most people who are losing great sums of money. In these times, ultra-safe TBills are the smart move!
Likewise, the illusion that investing in real estate is nearly risk free should be fading rapidly. As the market with the most leverage (debt), real estate hardly qualifies as a safe alternative to the stock market, as the deleveraging process should continue to drive real estate prices down for several more years.
Is Your Money Safe?
"I am far from certain that US equities, which have declined by about 50% from their highs, are such a a bargain. Valuations are far from where they were at major market lows such as in 1932, 1974, and 1982. Moreover, economic conditions may turn out to be far worse than in previous recessions, including the Great Depression at the beginning of the 1930s. Everybody seems to think that, thanks to the government's monetary and fiscal interventions, this recession will come nowhere near the 1930s slump. However, I think it might be far worse – and precisely because of the interventions." Economist, Dr. Marc Faber
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