Feeling bullish? the whole article is worth the read.
nytimes.com
But so far the decline has been comparatively shallow. The familiar Dow Jones average of 30 industrial blue chips, which peaked at 1,030.98 in April 1981, is down only 24 percent. The broader-based indexes peaked late in November 1980, amid the euphoria following Ronald Reagan's election. They have fallen further, reflecting greater demolition among small stocks. The Standard & Poor's 500 is down 27 percent, while the S.& P. 400 industrials is down 29 percent. By contrast - although the recession was not nearly so brutal -prices in 1973-74 fell 47 percent.
Some ways of looking at the market, however, suggest that it is on a par with the 1974 bottom. One yardstick is corporate earnings. When the Dow Jones industrials hit 577.60 in 1974, their price/earnings ratio was 5.8. Today, with the Dow 200 points higher, the P/E ratio is only 6.5. The S.& P. 400 industrials are lower than in 1974. Their P/E is currently 7, compared with 7.2 in 1974.
But virtually every professional investor believes that Wall Street's earnings estimates are too high. ''The market didn't anticipate how lousy earnings would be,'' said Ronald A. Glantz, who heads investment strategy at Paine Webber Mitchell Hutchins Inc., and who has been slashing earnings estimates drastically. If earnings do, indeed, turn out to be much lower, the market would have to fall further to equal the 1974 bottom.
A better yardstick is book value, which shows that today's market is no higher than the darkest days of 1974. ''The S.& P. 500 hasn't sold below book, and the Dow hasn't sold more than 20 percent below book since 1932,'' pointed out Morgan Stanley's Mr. Biggs. In 1974, the S.& P.'s price divided by the book value of its component companies was 1.0 while the Dow's was 0.8. Today the S.&P.'s is again 1.0 and the Dow's is a shade lower, 0.78.
BECAUSE the public has largely withdrawn from the market, trading has increasingly been dominated by institutions. Thus, if high-volume selling materializes, it may be the portfolio managers at bank trust departments, insurances companies, mutual fund and pension fund management firms that will do the dumping.
That could set the stage for a repeat of the 1970 plunge. In that bear market, it was the professional who panicked and the muchmaligned ''small investors'' who, to everyone's astonishment, moved in to buy at the bottom and to stem the decline.
I just wonder if we will return to these types of valuations or if it's "different this time". |
