Re: Birchtree's account talk
So my dear friends - what would the worst case scenario potentially be regarding this panicky stock market? " In the 1970s and in 2001, recessions were marked by nasty bear markets. In both cases, investors ignored the risks that were building in the market, believing that high valuations were justified, be they on houses or stocks, because prices would continue rising. The earlier recession also featured soaring energy prices. In a more benign scenario like 1990-1991, market performance is ugliest before and in the early days of a recession as investors panic about the effects of a downturn on earnings. Kinda like now.
What happens to the economy - how much it contracts and how high unemployment rises - doesn't necessarily determine how the market performs. The 1973-75 recession is generally considered the worst since World Was II, and the market selloff associated with it was appropriately ugly. (And yours' truly road the thunder on that puppy). The S&P 500 fell about 25% from the begining to the end of the recession, and the index fell about 48% during the entire bear market.
The 2001 recession was caused by the double whammy of the popping of the technology stock bubble and a major corporate profit downturn. Though the labor-market downturn that followed was tough, the effect on the economic growth was arguably quite mild. But the stock market's decline was prolonged and ugly. (Again yours' truly road the thunder on this puppy buying all the way to the bottom of the well). The S&P 500 fell about 8% during the recession and about 49% during the entire bear market, the steepest decline since World War II. The S&P 500 was still down nearly 18% a year after the 2001 recession was over. Typically, stocks are higher 12 months after a recession.
The fact that the chain of events stretched out longer than usual may have prolonged the market's agony. That could be a bad omen for today's market, given the slow unfolding of the housing debacle. But the market's decline was largely caused by the tech-stock bubble that preceded it. The anomaly in the market over the past few years has been the strength of corporate profits. If profits return to their long term trend, then forecasts for earnibgs growth this year could be too optimistic. In that case, the low P/E multiple at around 13.8 would be misleading.
One risk today is that a recession could make the housing market worse, because job losses tend to be the biggest cause of mortgage defaults, so home preices would keep falling. That would mean still more trouble for the home building sector and for banks plagued by toxic subprime assets, delaying the recovery of their earnings. If a recession's cause does hurt stock performance, the 1973-75 downturn offers another ominous precedent: It was driven mainly by an oil-price shock, and oil prices are at record highs once again." Wait until OPEC countries want to by agricultural products - they'll bend like a wheat stalk.
http://online.wsj.com/public/us
