Saturday, September 08, 2007

Another September Slump on the Way?

Why does the S&P tend to go down rather than up in September? Sam Stovall's Business Week column offers several theories.

Is a bear market coming? Maybe. Stovall points out that most bear markets aren't so bad.
[T]he only times that the S&P 500 did not recoup all that it lost in a prior bear market in fewer than two years was following bear markets in excess of 40%, which occurred in the early 1940s, early 1970s, and early in this decade. So if this pattern holds true, we won't likely see another one of those mega-meltdowns for another 25 years.
For a less sanguine view, consider this chart from a David Leonhardt column($) last month. It charts the price/earnings ratio the way the great Graham and Dodd thought it should be calculated. To minimize misleading fluctuations in corporate earnings from year to year, G&D believed investors should look at a moving average of earnings over five or ten years.

"Based on average profits over the last 10 years," Leanhardt observes, "the P/E ratio has been hovering around 27 recently. That’s higher than it has been at any other point over the last 130 years, save the great bubbles of the 1920s and the 1990s. The stock run-up of the 1990s was so big, in other words, that the market may still not have fully worked it off."

Perhaps the bears won't growl this winter. But the supply of uncertainty will be ample, enough to make investors seek hand-holding from experienced advisers.

1 comment:

Jim Gust said...

A ten-year lookback seems unreasonable. Why are the unrealistic p/e ratios of 1998 and 1999 relevant to determining whether stock prices are appropriate today?

On the other hand, the problems in the housing industry have always, historically, spread to the rest of the economy. We have a long ways to go before that sector returns to health.