Perhaps this is the beginning of the “savage” 20%-25% rally Paul Kedrosky predicted yesterday (see video below). He (and we) think things are going to get dicey again in early 2009, but we’re certainly due for a sustained run that makes people panic that they’ve missed the bottom and gets everyone on CNBC talking about a new bull market again. Or perhaps it’s just another head-fake.
Meanwhile, David Leonhardt at the New York Times observes that stocks are not “cheap”–they’re just modestly undervalued. David contrasts “bulls” like Buffett and Bogle, who are talking about buying stocks, with “bears” like Robert Shiller and James Melcher at Balestra Capital, who think stocks could get a lot cheaper. Most of these folks, however, are saying pretty much the same thing. And it’s the same thing we’re saying:
- For the first time in about 15 years, US stocks have dropped below their long-term average
- In the past, after other huge bubbles, stocks have “troughed” 50%+ below fair value (6000-ish on DOW, 500-ish on S&P), so there could be a lot more downside
- Stocks are priced to yield a better long-term return today than they have in 15 years (with the exception of a brief moment in 2003)
Specifically, the S&P 500 is priced to return about 9% over the long haul. That’s a return that is attractive enough to be worth owning whether or not stocks first drop another 40% from here. It is NOT, however, a price that guarantees that stocks won’t fall another 40%. So, as Jim Cramer reminded everyone recently, don’t keep your five-year money in the stock market. (Ever).