The Bear Market and Depression: How Close to the Bottom?
July 12, 2010
By
Elliott Wave International
While many people spend time yearning for the financial markets to turn
back up, a rare few have looked back in time to compare historical markets
with the current situation -- and then delivered a clear-eyed view of
the future informed by knowledge of the past. One who has is Robert
Prechter. When he thinks about markets and wave patterns, he goes back to
the 1700s, the 1800s, and -- most tellingly for our time now -- the early
1900s when the Great Depression weighed down the United States in the late
1920s and early 1930s. With this large wash of history in mind, he is able
to explain why he thinks we have a long way to go to get to the bottom of
this bear market.
Here is an excerpt from the EWI
Independent Investor eBook, which answers the question: How close to
the bottom are we?
* * * * *
Originally written by Robert Prechter for The Elliott Wave Theorist, January
2009
Some people contact us and say, “People are more bearish than I have
ever seen them. This has to be a bottom.” The first half of this statement
may well be true for many market observers. If one has been in the market
for less than 14 years, one has never seen people this bearish. But market
sentiment over those years was a historical anomaly. The annual dividend
payout from stocks reached its lowest level ever: less than half the previous
record. The P/E ratio reached its highest level ever: double the previous
record. The price-to-book value ratio went into the stratosphere, as did
the ratio between corporate bond yields and the same corporations’ stock
dividend yields.
During nine and a half of those years, from October 1998 to March 2008,
optimism dominated so consistently that bulls outnumbered bears among advisors
(per the Investors Intelligence polls) for 481 out of 490 weeks. Investors
got so used to this period of euphoria and financial excess that they have
taken it as the norm.
With that period as a benchmark, the moderate slippage in optimism since
2007 does appear as a severe change. But observe a subtle irony: When commentators
agree that investors are too bearish, they say so to justify being bullish.
Thus, as part of the crowd, they are still seeking rationalizations for their
continued optimism, and one of their best excuses is that everyone
else is bearish. This would be reasoning, not rationalization, if it were
true.
But is the net reduction in optimism since 2000/2007 in fact enough to indicate
a market bottom? For the rest of this issue, we will update the key indicators
from Conquer the Crash that so powerfully signaled a historic top
in the making. When we are finished, you will know whether or not the market
is at bottom.
Figure 1 updates our picture of Supercycle and Grand Supercycle-degree periods
of prosperity and depression. The top formed in the past decade is the biggest
since 1720, yet, as you can see, the decline so far is small compared to
the three that preceded it. There is a lot more room to go on the downside.
Figure 2 updates the Dow’s dividend yield. Over the past nine years,
it has improved nicely, from 1.3 percent to 3.7 percent, near its level at
previous market tops. If companies’ dividends were to stay
the same, a 50 percent drop in stock prices from here would bring the Dow’s
yield back into the area where it was at the stock market bottoms of 1942,
1949, 1974 and 1982. But of course, dividends will not stay the same.
Companies are cutting dividends and will cut more as the depression deepens.
So, the falling stock market is chasing an elusive quarry in the form of
an attractive dividend yield. This is a downward spiral that will not end
until prices get ahead of dividend cuts and the Dow’s dividend yield
goes above that of 1932, which was 17 percent (or until dividends fall so
close to zero that the yield is meaningless).
Get the whole
story about how much farther we have to go to a bear-market bottom by
reading the rest of this article from EWI's Independent Investor eBook.
The fastest way to read it AND the six new chapters in EWI's
Independent Investor eBook is to become a member of Club EWI.
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