Wall Street is now talking openly about the possibility of the DOW dropping to 5,000 and the S&P 500 to 400-500. This is actually good news. The more negative everyone gets, the more likely we’re getting close to a bottom.
(Unfortunately, few strategists are actually predicting the market will hit this level yet. But at least they’re talking about it.)
The bad news is that 400-500 on the S&P would still be higher than previous major bear market lows on a price-earnings basis (See Robert Shiller’s chart above and “How Low Can The Market Go?”). Fortunately, it’s not that much higher.
In the WSJ’s story on DOW 5000 today, here’s one fact that jumped out:
Between April 8, 1932, and July 8, 1932, stocks fell 34% — a little more than what it would take to get the S&P to 500.
A level of 500 would take declines for the S&P to 68% since its October 2007 high, compared with the peak-to-trough depression-era slump of almost 90%.
The most persuasive argument we’ve heard as to why stocks won’t crash toward the Depression lows is Paul Kasriel’s observation that the government has not yet blown it to the extent that the Hoover administration did. Richard Sylla of NYU echoes that view:
This time, the barrage of government policy prescriptions make a decline of Depression-era magnitude very unlikely, says Richard Sylla, a financial historian and economics professor at New York University’s Stern School of Business.
“People say [government policy] hasn’t worked yet, and there have been slips in the execution, but I would say things could be much worse. It will put a bit of a floor under the declines,” Mr. Sylla says. That said, he thinks stocks aren’t at their lows yet, and guesses the Dow will bottom near 6000.
Only 6000? No problem.
See Also: How Low Can The Market Go?
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