The light at the end of the market tunnel
The way the markets have performed over the past several months, it is easy to become discouraged and to believe that the situation is going to get much worse. But investors should always remember that no one has ever been able to predict market behavior with 100% accuracy. And the financial markets have a way of surprising even the experts by doing things that have not occurred in the past.
While the picture remains gloomy for now, there are a number of reasons that investors should start preparing for the end of this downturn. For example, the U.S. Department of Labor reported that unemployment jumped 0.5% in May 2008. In the past 50 years, this is only the 12th time that the jobless rate has jumped that much in a single month. The previous 11 times, in the 12 months following the S&P 500 has risen by at least 17.6% and the average gain was 26.8%.
The Wall Street Journal reported that earnings per share of the S&P 500 companies in the second quarter of 2008 are expected to be 18% below the same quarter in 2007. It will mark the fourth consecutive quarter of smaller profits. The all-time record for declining earnings is five straight quarters.
The current bear market is the 14th to occur since 1950. The average duration of the previous 13 bear markets is about 15 months. The current bear market began in October 2007. It will reach that 15-month mark about the end of the year.
One can argue that the circumstances surrounding this bear market are very serious and could prolong its impact. But the truth is that the situations that create any bear market are grave and unusual. The bear market that began in 2000 was already a year old when terrorists brought down the World Trade Center. That event deepened and extended the bear market to one of the worst in the history of the financial markets. The current situation is not nearly as dire.
Below is a chart of the S&P 500 over the past decade. One can easily see the severity of the 2000-2002 bear market. But you can also see the bear market we are now enduring is no slouch. The bottom portion of the chart is a moving average convergence divergence and it shows that we have not seen this kind of volatility for more than five years.
Of course just because we think the end of this bear is in sight does not mean anyone can pinpoint the exact bottom. As an investor I’d be a little cautious about jumping back into the market at this point. On the other hand, now is undoubtedly a better time than last October!
I can’t tell you what the catalyst will be that will start the next bull market. It could happen when the price of oil drops below $100 a barrel. It could be the presidential election. So while it is easy to be discouraged right now and to start to believe that this will never end, take heart. That usually means the bottom is right around the corner.
F.S.
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