S&P’s chief investment strategist says a bear-market bottom may already be in place—and tells why 2009 could be a better year for stocks
By Sam Stovall From Standard & Poor’s Equity Research Investing
Excerpted from a report published by Standard & Poor’s Equity Research Services on Dec. 22
Investors will remember 2008 as a year of change. Not just change in the White House, but also the pocket change that they used to call their portfolios.
Let’s face it. This bear market started as the perfect storm of popping bubbles—commodities, emerging markets, hedge funds, and real estate. From Oct. 9, 2007 through Nov. 20, 2008, the S&P 500 (SPX) declined 52%, making it the third-worst bear market since the 1929-32 crash. One of the more amazing characteristics of this decline was its speed. The average “mega-meltdown,” or bear market decline of more than 40%, traditionally took 21 months to play out. This one took 13 months.
Not surprisingly, all 10 sectors within the “500” fell, from a 22% slump for Consumer Staples to a 74% thrashing for the Financials. Finally, 125 of the 128 subindustries in the S&P 500 declined.
Factors Backing a Bottom
Where do we go from here? Probably not lower, in our opinion. A few months ago, I wrote that 700 on the “500” might be a worst-case scenario for a decline, citing the trendline drawn off of the 1932 low, the average bear-market retracement of prior bull market advances, and the applying of a bear market P/E ratio on a conservative “top-down” EPS estimate. We got close to that level, as the S&P 500 closed at 752 on Nov. 20. Since then, it rose 21%—technically signaling the start of a new bull market. So I say why quibble? What’s 50 points among friends? Besides, we believe there are several reasons that a bear-market bottom may already be in place.