From the lows reached a few days before Thanksgiving, stock indexes have risen about 20%. Do not be fooled by this rally into thinking the Bear Market is over .
A true Bear Market is characterized by falling price earnings ratios. Serious bear markets usually end with P/E ratios in single digits, often in the six to eight range. According to the estimate of Standard & Poors Corporation, based on reported earnings as of December 23rd, the S&P 500 price stands at about 18 times 2008 earnings.
If the P/E ratio falls to nine times earnings, then the S&P 500 could to fall to about 450. In recessions during the last forty-five years, earnings have fallen by ten to twenty-five percent. If that is factored into the equation as well, you can imagine that we are still in for a lot of pain.
I say “we” and not just “investors” because the recession will produce more job layoffs, serious distress for state and local governments, and enormous federal deficits.
Investors would be wise to sell on rallies and keep cash in short-term U.S. Treasury securities. This is a good time to invest with the philosophy of Depression era comic Will Rogers’ who said, “I’m more concerned about the return ‘of’ my money than the return ‘on’ my money.”
In my next post, I will spell-out why deflation is the problem we now face and why the government can do so little to stop it.
Never forget, times of financial stress are also times of financial opportunity.