Much is written about steep drops in the stock market and the eventual recovery. In basic terms, it is fear and greed that drive the market and as Stephen Savage wrote in Financial-Planning.com magazine (September 2008, over a year ago), "...the sense of fear that magnifies perceptions of risk...causes stock prices to discount more than fundamentals would dictate..."
In October of 2007, the stock market (as valued by the DOW at over 14,100) was not over-valued and at dizzying heights as it was in March of 2000 (when the DOW was at over 11,000). The DOW value is relative to earnings and growth projections.
What matters is patience and riding out severe discounting of the market as well as understanding of the severe markups in the market for future growth. In March 2000, the P/E (price-earning ratio) was well over 30 and the recovery (months to recover from the trough)took 51 months. In 1980-2, the P/E ratio was around 8 (do realize that this is fictitiously low also because inflation was so high and distorts all the numbers) but the recovery took 2 months.
In October 2007, the P/E was hovering above its historical average of 15-16 but it was not in the stratosphere of the year 2000. The 1920's also was a crazy time of exuberance before the Great Depression and has more similarities to the 1990's than to the 2002-2007 period before our current Great Recession.
The months it takes to reach the bottom (the trough) also portends, historically, how long it takes to recover. It took 30 months to go from March 2000 highs to the low on 10/9/02 and 51 months to recover. From October 2007 until March 2009 was about 17 months (if, indeed, we do not see that low again - as there are no guarantees that we are through with this). That is a pretty quick decline and one reason why everyone felt it more. The 2000-2002 decline was 46% and the 2007-2009 decline was 52% but it felt worse.
Anyway, since 1950, there have been 13 significant drops like this. Recoveries have averaged from 2 months to 51 months. Only time will tell.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.