Description
During our current Panic, the median P/E reported
over the last 12 months is 20 while the Panic trough
on October 10, 2008 was 12.5 (based upon the
market’s 2009 estimate of aggregate S&P earnings
near $70). Over the next few months we would
not be surprised to see the median P/E decline to
or below 14 if the inflation rates creep higher than
4.3%. With the Cowles & Smith Composite Index
prior to 1957 and S&P 500 Index thereafter, we
reviewed 25 stock market declines. The median
and average duration of all declines was 20 months
while respective price troughs for these measures
were -33% and -37%.
The median and average P/Es for the duration of all declines were 14 and 15. Panic declines lasted longer (with a median of 29 months) and were more severe (-46%). Low & Median P/Es During Panic Periods 25 Bear Markets START END (Blue = "Panics" ) MONTHS CHANGE 52 43 12 34 22 22 22 13 21 34 12 5 31 37 6 8 18 23 17 16 2 3 3 24 20 29 20 12 -47% -32% -32% -46% -49% -27% -24% -40% -47% -86% -54% -26% -43% -30% -28% -22% -36% -46% -20% -24% -33% -20% -21% -49% -33% -46% -37% -43% 2/27/1873 6/30/1877 1/31/1893 8/31/1896 9/5/1899 9/24/1900 1/12/1901 11/9/1903 1/19/1906 11/15/1907 11/19/1909 9/25/1911 9/30/1912 7/30/1914 11/21/1916 12/19/1917 11/3/1919 8/24/1921 9/7/1929 7/8/1932 3/10/1937 3/31/1938 11/12/1938 4/8/1939 9/12/1939 4/28/1942 5/29/1946 6/13/1949 12/12/1961 6/26/1962 2/9/1966 10/7/1966 11/29/1968 5/26/1970 1/11/1973 12/6/1974 9/21/1976 3/6/1978 4/27/1981 8/12/1982 8/25/1987 10/19/1987 7/16/1990 10/11/1990 7/20/1998 10/8/1998 9/1/2000 10/9/2002 Total Median "Panics" Median Average 10/9/2007 10/10/2008 CPI P/Es -8.1% -5.3% 1.3% 5.3% 8.4% 2.1% 2.0% 23.4% -4.3% -21.4% -0.7% -1.4% 14.2% 29.3% 0.7% 2.4% 9.0% 21.5% 13.4% 9.7% 0.6% 2.2% 0.4% 4.1% 2.2% 2.3% 4.5% 5.1% 14 22 14 14 13 13 14 7 10 19 14 15 9 9 18 16 16 12 9 8 20 15 28 34 14 14 15 17 Cumulative Conclusion To match medians and averages, the current Panic may not end until June 2009 or April 2010. Absent of an extreme downturn, we may be approaching Panics of 1873, 1884, 1929 & 1937 (CPI Deflation); 1901, 1907, 1973 & 1981 (CPI Inflation). a Double Bottom in a secular bear market that has Performance displayed represents past performance, which is no guarantee of existed since 2000.
It is critical to long term performance that investors avoid market stampedes. future results. Irrational exuberance turns to flight, flight to panic and panic can lead to outright disaster. Investors need to stay calm during Panic Periods and avoid getting swept up in group hysteria.
Instead, they should make independent decisions that lead to profits, like buying when the crowd sells. Remember, financial markets are always shifting between greed and fear. Historically, a declining market has always come back, regardless of how shocking the events were that drove it down. When returning to the equity markets, investors should look for consistent gains and avoid the “home run” mentality. The investor’s miracle is a steady compounded return over time.
During Panic Periods investors should consider employing a buying strategy that falls within a price range. Don’t make huge bets, instead scale in a portion (i.e., 20%) of investment capital today and allocate more if the market drives the price down again. Buying into the equity market at sensible multiples benefits the investor when the market ultimately returns. Projecting the markets with P/Es - The worksheet below was designed to help estimate downside risk for the S&P 500 from a P/E perspective.
Columns A, B, and C employ the following: the average earnings reported in the past 5 years (20 quarters), 12-month trailing reported earnings and operating estimates for 2009. The final column was provided to normalize the earnings estimate. The worksheet provides two P/E estimates and the corresponding changes in the S&P 500 from its high and low: 1) P/E of 12 which reflects panics or protracted recessions 2) P/E of 16 which reflects the mean since 1940 S&P Prices Based On P/Es: S&P 500 Earnings Results Reported Earnings 5-yr Mean 12-month "A" "B" 65.32 51.83 Estimated 2009 Earnings "C" 77.61 Normalized Earnings A+B+C 64.92 S&P 500 Price based on a PE of 12 (Panic P/E) % Change from 10/10/08 Low (839.8) % Change from 10/11/07 High (1576.09) 784 -7% -50% 622 -26% -61% 931 11% -41% 779 -7% -51% S&P 500 Price based on a PE of 16 (Historic Avg since 1940) % Change from 10/10/08 Low (839.8) % Change from 10/11/07 High (1576.09) 1045 24% -34% 829 -1% -47% 1242 48% -21% 1039 24% -34% Data Sources: Morningstar; Cowels & Smith.
S&P 500 Operating Earnings by Economic Sector: Bottom-Up Estimates as of 9/23/2008. The information provided is intended to be general in nature and should not be construed as investment advice. This information is subject to change at anytime, based on market and other conditions and should not be construed as a recommendation of any specific security. P/E Ratio: The price-to-earnings ratio is the price of a stock divided by the earnings per share.
Standard Deviation: A statistical measure of the historical volatility or risk of an investment. The higher the standard deviation, the greater the historical volatility of returns for investors. 0768-NLD-6/17/2009 .
The median and average P/Es for the duration of all declines were 14 and 15. Panic declines lasted longer (with a median of 29 months) and were more severe (-46%). Low & Median P/Es During Panic Periods 25 Bear Markets START END (Blue = "Panics" ) MONTHS CHANGE 52 43 12 34 22 22 22 13 21 34 12 5 31 37 6 8 18 23 17 16 2 3 3 24 20 29 20 12 -47% -32% -32% -46% -49% -27% -24% -40% -47% -86% -54% -26% -43% -30% -28% -22% -36% -46% -20% -24% -33% -20% -21% -49% -33% -46% -37% -43% 2/27/1873 6/30/1877 1/31/1893 8/31/1896 9/5/1899 9/24/1900 1/12/1901 11/9/1903 1/19/1906 11/15/1907 11/19/1909 9/25/1911 9/30/1912 7/30/1914 11/21/1916 12/19/1917 11/3/1919 8/24/1921 9/7/1929 7/8/1932 3/10/1937 3/31/1938 11/12/1938 4/8/1939 9/12/1939 4/28/1942 5/29/1946 6/13/1949 12/12/1961 6/26/1962 2/9/1966 10/7/1966 11/29/1968 5/26/1970 1/11/1973 12/6/1974 9/21/1976 3/6/1978 4/27/1981 8/12/1982 8/25/1987 10/19/1987 7/16/1990 10/11/1990 7/20/1998 10/8/1998 9/1/2000 10/9/2002 Total Median "Panics" Median Average 10/9/2007 10/10/2008 CPI P/Es -8.1% -5.3% 1.3% 5.3% 8.4% 2.1% 2.0% 23.4% -4.3% -21.4% -0.7% -1.4% 14.2% 29.3% 0.7% 2.4% 9.0% 21.5% 13.4% 9.7% 0.6% 2.2% 0.4% 4.1% 2.2% 2.3% 4.5% 5.1% 14 22 14 14 13 13 14 7 10 19 14 15 9 9 18 16 16 12 9 8 20 15 28 34 14 14 15 17 Cumulative Conclusion To match medians and averages, the current Panic may not end until June 2009 or April 2010. Absent of an extreme downturn, we may be approaching Panics of 1873, 1884, 1929 & 1937 (CPI Deflation); 1901, 1907, 1973 & 1981 (CPI Inflation). a Double Bottom in a secular bear market that has Performance displayed represents past performance, which is no guarantee of existed since 2000.
It is critical to long term performance that investors avoid market stampedes. future results. Irrational exuberance turns to flight, flight to panic and panic can lead to outright disaster. Investors need to stay calm during Panic Periods and avoid getting swept up in group hysteria.
Instead, they should make independent decisions that lead to profits, like buying when the crowd sells. Remember, financial markets are always shifting between greed and fear. Historically, a declining market has always come back, regardless of how shocking the events were that drove it down. When returning to the equity markets, investors should look for consistent gains and avoid the “home run” mentality. The investor’s miracle is a steady compounded return over time.
During Panic Periods investors should consider employing a buying strategy that falls within a price range. Don’t make huge bets, instead scale in a portion (i.e., 20%) of investment capital today and allocate more if the market drives the price down again. Buying into the equity market at sensible multiples benefits the investor when the market ultimately returns. Projecting the markets with P/Es - The worksheet below was designed to help estimate downside risk for the S&P 500 from a P/E perspective.
Columns A, B, and C employ the following: the average earnings reported in the past 5 years (20 quarters), 12-month trailing reported earnings and operating estimates for 2009. The final column was provided to normalize the earnings estimate. The worksheet provides two P/E estimates and the corresponding changes in the S&P 500 from its high and low: 1) P/E of 12 which reflects panics or protracted recessions 2) P/E of 16 which reflects the mean since 1940 S&P Prices Based On P/Es: S&P 500 Earnings Results Reported Earnings 5-yr Mean 12-month "A" "B" 65.32 51.83 Estimated 2009 Earnings "C" 77.61 Normalized Earnings A+B+C 64.92 S&P 500 Price based on a PE of 12 (Panic P/E) % Change from 10/10/08 Low (839.8) % Change from 10/11/07 High (1576.09) 784 -7% -50% 622 -26% -61% 931 11% -41% 779 -7% -51% S&P 500 Price based on a PE of 16 (Historic Avg since 1940) % Change from 10/10/08 Low (839.8) % Change from 10/11/07 High (1576.09) 1045 24% -34% 829 -1% -47% 1242 48% -21% 1039 24% -34% Data Sources: Morningstar; Cowels & Smith.
S&P 500 Operating Earnings by Economic Sector: Bottom-Up Estimates as of 9/23/2008. The information provided is intended to be general in nature and should not be construed as investment advice. This information is subject to change at anytime, based on market and other conditions and should not be construed as a recommendation of any specific security. P/E Ratio: The price-to-earnings ratio is the price of a stock divided by the earnings per share.
Standard Deviation: A statistical measure of the historical volatility or risk of an investment. The higher the standard deviation, the greater the historical volatility of returns for investors. 0768-NLD-6/17/2009 .
