Whether the market is a bear or a bull, there is always bargains in some sector. The overall PE ratio of the S&P is around 28 i believe (off the high of 33). Historically, the P/E fluctuates between 8 and 20, 8 in a bear market where dividend stream becomes important and 20 in a bull when revenue growth seems to be important (that is a generalization). So, if we can say that the market right now, being at or near the end of a very good business cycle should have an average P/E of 20, then the S&P is overvalued by about 30%. If the economy slows and we begin the spiral of lower growth and earnings, the P/E should gravitate to 8 or so. Compounding this is the fact that during recessions, companies make roughly 1/3rd of the income they make during their peaks we can say that:
If a recession starts now (or soon), we can see the S&P trading at a P/E of 8 with one third the current earnings. I believe that would put the index at about a 90% loss from today's level.
When the psychology of the market turns, earnings estimates, GDP growth, productivity growth, etc. all go out the flipping window. Panic, selling, panic, more selling, consumers stop buying, businesses stop expanding, layoffs, etc. History has already shown us what happens to credit bubbles, be it 1929 US , be it 1990 Japan, 1980 Gold, Tulip Mania, South Sea Bubble, etc. There really is, via the law of averages, one direction this market should go. Down the toilet. |
