The DJIA dropped another 675 points today, bringing it down to 8579. Exactly one year ago, it was at 14,164 – its’ all time high. Aren’t you glad you pulled all your money out of the market last year?
What’s that you say? You didn’t move to cash because you’re in this for the long term, you’re a buy and hold investor? Oops!
According to a story on CNN.com today, “We are in a free fall right now and fundamentals have been thrown out the window,” said Phil Orlando, chief equity market strategist at Federated Investors.
Ummm…. Wrong. The “fundamentals” have NOT been thrown out the window Mr. Orlando – the fundamentals are what’s causing the drop. We’re at the start of the 3rd quarter earnings season, and there’s no doubt that earnings will be drastically lower than Q3 of 07.
So stock prices HAVE to adjust to keep the price earnings ratio reasonable. I guess the only question is how low earnings will be – which will tell us how low the stock prices will go.
With the latest drop, the S&P 500 is at a PE of about 12 – which is right about the long term mean. We’ve been way above that for a long time, so I expect to see the PE “revert to the mean” long term, which means we need to go below a PE of 12 for awhile. Possibly as low as 8 – which is what the ratio was back in the early 70′s and the great depression.
So, how low can we go? Let me know if you have a guess. I’m guessing maybe 7500? But that’s just a guess.
gk
Filed under: Economy Tagged: | Bush is an idiot, DJIA, S&P 500, Stock Market
