I have a feeling we are going into a recession induced bear market, which is the worst kind. They are longer in average duration, represent some of the deepest declines, and are indifferent to starting P/E multiples which for the S&P 500 shows a current trailing P/E ratio of 15.6 which is really not all that bad especially compared to 2000 when it was approaching 30. If we are heading in such a direction then the first half of 2008 will not be pleasant due to the majority of the stock market losses occurring early in these types of markets. We are in a dense economic fog right now and the markets don’t like fog.
Here is a little history of recession induced bear markets for the S&P 500 with their starting P/E and percentage drop in value
1973 starting P/E 18, -45%
1978 starting P/E 9, -16%
1981 starting P/E 8, -24%
1990 starting P/E 13, -21%
2000 starting P/E 31, -48%
2008 starting P/E 15.6, ??
1981 stands out because of its low p/e at 8 yet the S&P 500 lost 24% of its value. That was a bad recession. If we enter a recession of that scale which some economist are making strong cases for (i.e. Roubini) and we are starting at a p/e nearly double that of 1981 then……in THEORY…..we could be looking at a substantial decline in the stock market. A 40% decline would put the S&P 500 at about 954 from the top this last October.
