A month ago, I noted that the market had clearly returned to its bear market trend, but I joked that it couldn't keep falling at the rapid pace (faster than the erosion of the year). Sadly, it has. We are now 13.8% through 2009, while the S&P 500 has now declined in price by 14.7%. The chart below shows that we are falling much faster than we fell in 2008:
Even more disturbing, the decline in absolute terms is worse: The S&P 500 has dropped 133 points in 2009, while it had declined "just" 108 points at this time a year ago. Additionally, it is worth noting that the market didn't reach this level of percentage decline until July last year.
I didn't want to clutter the chart, but consider the following comparisons for the returns YTD through 2/20 in the following years from bear markets:
- 2009: -14.7%
- 2008: -7.4%
- 2002: -4.4%
- 2001: -3.1%
- 1982: -7.6%
- 1974: -4.2%
- 1973: -2.2%
- 1970: -3.5%
I am not exactly sure what to make of this. For now, I recently shared my outlook for 2009 for stocks in that same article linked above, and I am staying with my expectations that the market ends the year down 15-20%. Still, between here and there, as I alluded, it could get worse. The low at the low-end of the range I project for what will hopefully be "the" ultimate bottom would be a decline of about 31% y.t.d. in the Sep/Oct time-frame. While the market seems very oversold now, playing that game hasn't been a fun one except for very brief periods. While we could be setting up now, I think that the next big bounce comes in Q2 as we get to what will surely be yet another absolutely horrible earnings season. We are still early in the year. While fundamentals seem to be getting worse around the world, there is a ton of fear and a large wad of cash that is afraid still of missing the next big rally.
So, this market is one of the worst in quite a long time. For some historical perspective, though, I wanted to see where we stand relative to an even longer time-frame. Can it get worse? Indeed it can, as one can easily see in the chart below. Using StockVal, I compiled weekly year-over-year returns for the past 80 years (the full extent of their database) for the S&P 500:
The good news is that we are pretty extreme right now at a 43% decline from a year ago. In the Great Depression, though, the market plunged to an over 70% annual decline at its bottom. My recollection, though, is that margin played a significant role back then in terms of exacerbating the decline in equities. As I consider my 625 potential fall bottom (and assume it occurs October 15th), the year-over-year decline at that point would be just 31%. The market can keep falling while the annual decline improves! If my level is right but my timing is off by 6 months, the year-over-year decline on April 15th would be 53%. I suppose it is possible that we see an even greater decline than I expect (that surely has been the trend!), but it would seem as though the bottom I expect can be supported in the context of extreme annual declines whether it occurs in the next few months or later this year. As I look at the price history of the S&P 500 over my lifetime, I take a little comfort that the area I look to serve as a potential bottom makes sense:
A move back to 1996 prices is supported by some consolidation that year. The retracement off of the move from the bottom of the last really bad bear market in 73-74 (which means that 2008-09 is part of a larger topping formation) from the 2007 peak to 650 would be about 61.5%, which corresponds to a Fibonacci retracement. While it is hard to project precisely what the 2009 operating earnings will be, the current expectation is $66, which would be an increase of 21% from the current forecast for the almost complete 2008. Unlikely! I'll go with 50 and hope that's not too aggressive. 650 would work out to 13X. The more important number though will be 2010 as the year progresses. Hopefully that year sees substantial recovery growth in percentage terms. In any event, the market may finally be willing to pay a higher multiple when the market is recovering. 650 should look cheap late in 2009 if $60 in 2010 is anywhere close to correct, especially if the credit crisis has softened and corporate bond yields remain as low as they are now.
I noticed one other interesting potential historical comparison. After stocks enjoyed a large run-up from 1962 to 1968 (recall the "Nifty 50"), they peaked and sold off very sharply into 1970. They then rallied to new highs in 1972 before a horrible bear market. While history never plays out the exact same, it is interesting that like this bear market, which has now cleared the lows of the last bear market (01-02), the 73-74 bear market did the same. It found support at the top of a consolidation range from 11 years earlier. While I think that in many ways our economy is closer to the Great Depression than any other period in terms of the severity and depth of the crisis, I hope that the stock market ends up acting more like 73-74 than the 30s. Hope, though, hasn't really been an effective strategy in the past couple of years to say the least!